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EURUSD shoots higher on Bernanke and Trichet Comments

Last updated 10/4/2011 11:30 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

The prospect of easier monetary policy in the U.S. has driven the U.S. dollar sharply lower.  Federal Reserve Chairman Ben Bernanke admitted to the Joint Economic Committee and the world for that matter that Operation Twist was basically a failure because it did not have an enormous effect on the economy when a strong dose of stimulus was desperately needed. There was a general sense of defeat in the Chairman’s voice which disappointed investors because the U.S. relies on its central bank to use monetary policy to jumpstart the economy.  Although Bernanke said the central bank is ready to take further action when necessary, he also admitted that his hands are tied because monetary policy is “not a panacea for the U.S. economy.” Yet even if the impact of monetary policy is limited, it is the Federal Reserve’s obligation to exhaust all of their options and for this reason, the sell-off in the dollar represents investors’ expectations for QE3.  Bernanke spent most of his testimony outlining all of the risks to growth and inflation including the weak labor market, the European crisis and government cuts.  It was depressing to listen to the Fed Chairman say that job growth will remain sluggish and that the U.S. is still a long ways from recovery.  Based upon the pessimism in Bernanke voice, it will only be a matter of time before the Fed announces another asset purchase program. 

The sell-off in the dollar was the most pronounced against the euro because comments from ECB President Trichet this morning suggests that he is not a fan of lower interest rates.  Trichet started his speech by saying that the central bank’s primary aim is price stability and for the time being, inflation is expected to stay above 2 percent until next year.  Although he admits that the risks to the economic outlook are to the downside, he also sees moderate growth in the second half of the year. Most importantly, he is not in favor of bailout funds refinanced by the ECB which shows that he too is challenging the bailout structures cited by various media agencies last week. 

With Bernanke talking about the need for easier monetary policy and Trichet sounding firmly comfortable with keeping rates on hold, we can see why the euro has shot higher against the U.S. dollar. 

This morning’s U.S. factory orders report was also weaker than expected.  Factory orders are back in negative territory in August falling by -0.2 percent versus a 0.2 percent forecast.  The decline in August follows a 2.1 percent increase in July, which was downwardly revised from 2.4 percent.  New orders for factory goods fell for the second time in three months, suggesting a possible softening in the manufacturing sector which has thus far carried the economic recovery.

Orders excluding transportation decreased for the first time in six months, falling 0.2 percent.  Orders for transportation equipment dipped 0.1 percent in August as demand for motor vehicles fell 5.3 percent.  Civilian aircraft orders rose 23.5 percent.  Unfilled orders rose 0.9 percent after climbing at the same rate in July, suggesting factories might have to increase production.  Shipments fell 0.2 percent after rising 1.2 percent the prior month, while inventories increased 0.4 percent.  Orders for durable goods fell 0.1 percent, unrevised from an initial estimate released last week.

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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.