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Bernanke on the Defensive, Driving the USD Lower

Last updated 2/24/2010 10:44 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

Bernanke is taking the stand this morning before the House of Representatives in Washington to deliver his semiannual report on monetary policy.  Having already done this 8 times in the past, Bernanke knows that he is prepared to come under some serious grilling.  

Given the vulnerability of the U.S. recovery and the audience that he is speaking to, Bernanke will most likely be on the defensive.  Members of Congress will express the frustration of their constituents about the pace of the recovery and the lack of job growth.  The only satisfactory response that Bernanke can give is that the Fed will keep interest rates low for as long as possible and to reassure Congress that although normalization of monetary policy is underway, the impact on households should be minimal.  with that in mind, Bernanke has already acknowledged that the labor market remains weak and inflation will likely be subdued for some time, which are not the words of a hawkish central banker.  Although private demand is growing at a moderate pace, low inflation and the lack of job growth will limit any additional normalization by the Federal Reserve.  Bernanke confirmed this by saying that the "nascent" or new recovery requires low rates.  

Dollar bulls were sorely disappointed by Bernanke's comments.  Forex traders were very long dollars going into the release of his prepared statement and Bernanke's failure to telegraph additional tightening sent the dollar sharply lower against all of the major currencies.  At minimum, traders wanted to hear optimism from the Fed Chairman but unfortunately his comments were subdued.  With many Americans still out of work, it would have been politically unsavvy for Bernanke to appear overly optimistic, knowing that members of Congress will be criticizing the pace of recovery in an election year where their constituents face near-double-digit unemployment, record foreclosures and hard to get credit, especially for small businesses. Did you really think he would sit in the hot seat touting the recovery only to have Congress jump down his throat in the Question and Answer session?  Therefore we expect Bernanke to be on the defensive for most of the day which should limit any rise in the dollar.  However in the grand scheme of things, the dollar may not fall much either because the Fed is still more hawkish than the ECB and BoE.  Questioning by Congress usually ends at 12pm NY Time.

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Comments (1)

heywally

February 25, 2010 at 11:17 AM ET

Comforting to know that we have politicians with enough economic expertise that they feel comfortable 'grilling' Bernanke.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.