EUR USD (1.4265) Ben Bernanke recently admitted not knowing why the slower pace of growth is persisting, but avoided any mention of another monetary easing programme. The Fed chief reported that the QE2 programme has been very successful in eliminating deflation risk and so the conditions right now are very different from when it was announced last summer. The dollar rallied some 300-pips on the omission of QE3, whether in relief that the currency won’t be further diluted or on risk-aversion because of no new monetary stimulus. Mr Bernanke’s opinion notwithstanding, the Financial Times pointed out yesterday that the US bond market has already begun signalling deflation risk as the yield on 5-year Treasury notes fell below 1.5 percent – the core rate of US inflation. Indeed, Pimco chief Bill Gross tweeted Wednesday that the Fed will likely hint at QE3 at the next Jackson Hole meeting in August. Otherwise, many market participants still contend that the stock market holds the key to another programme. Meanwhile, the Bloomberg National Poll revealed this morning that two-thirds of US residents say the nation is on the wrong track and 55 percent believe their children will have a lower standard of living. The poll also registered an approval rating for the central bank chairman at 30 percent.
The euro is still vulnerable and losses could quickly reach 1.4010 if the 1.4210 support yields. As before, stabilisation lies beyond 1.4455.
Market Bias Index
It could have been worse – the euro is still only perceived as modestly undervalued versus the US dollar. Meanwhile, perceptions of the Swiss franc’s overvaluation have likely become more acute.
Deutsche Bank
Fixed Income Research – Global