EUR/USD (1.4370) James Bullard said in an interview published by Nikkei yesterday that he would support a US central bank action if the economy weakens substantially, and especially if deflation becomes a risk again. The St Louis Fed President said that he would advocate QE3 on a meeting-by-meeting basis if needed, but he also suggested that there are other possibilities for action: lowering the interest rate on excess reserves, substituting longer bonds for shorter notes and bills (operation ‘twist’), and committing to the size of the Fed’s balance sheet. Market participants are anxiously awaiting President Bernanke’s speech from Jackson Hole on Friday, with many of them expecting the Fed chief to announce another round of bond-buying after the recent blows the stock market has suffered. However, while last year they were hoping for QE2 and got it, this year is different in that the threat of deflation is no longer apparent. Moreover, last year the FOMC agreed with Mr Bernanke unanimously, but at the meeting on August 9th where the FOMC extended extremely low rates until mid-2013 there were three dissenters amongst the voting members.
The US dollar probably wouldn’t extract an advantage over the euro from any of the Fed’s possible actions. The euro remains stable above 1.4160 (interim support lies at 1.4285), and its sideways pattern could be broken on a surpass of the 1.4590 hurdle.
Market Bias Index
The Market Bias Index is only slightly changed today, where no currency bias reaches beyond the two-percent level. The EUR/USD’s sideways pattern is supported by the neutrality displayed here.
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Deutsche Bank
Fixed Income Research – Global