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The Bernanke Paradox

Last updated 7/18/2012 11:19 AM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Overnight markets had a much different interpretation of Federal Reserve President Ben Bernanke’s testimony than North American traders had yesterday. While the Asian and European markets agreed with the initial sentiment of no QE3 coming at the next monetary policy decision, North American traders focused on the “other methods” that the Fed may introduce. Therefore, markets have been a bit of a battle over who has the most liquidity in the market at the time. The original drop in risk at the start of the North American session yesterday was quickly reversed by the end of the day only to be reversed again overnight. As Bernanke takes questions from the supposedly financially savvy Barney Frank (of Dodd-Frank fame), Ron Paul (of “End the Fed” fame), and the rest of the House subcommittee, we shall see if he gives any more clues to the Fed’s plans moving forward. Chances are he will most likely repeat the same doctrine of “our options are open” that he gave to the Senate subcommittee yesterday. That means any investors holding out hope that Bernanke would signal the QE3 floodgates to be released may finally yield their stances, creating a selloff in risk assets.

On the financial news front, the US had some more encouraging numbers out of the housing sector. Mortgage approvals rebounded strongly up to 16.9% from a 2.1% decline previously and Housing Starts increased more than expected up to 760k, with the previous figure being revised upward. However, Building Permits declined to 755k from 784k previous and a 765k expectation. While the numbers were mixed, it points to at least one bright spot in the bleak economic outlook in the US, the housing sector. Bernanke even pointed to the positive developments out of this industry in his prepared statements to Congress. Tomorrow’s Existing Home Sales release will give us a further clue as to if this trend will continue.

The rest of the North American trading session will be highly dependent upon how Bernanke answers the questions from the House. My bias is more to the risk off side as I believe that traders holding out hope for QE3 will relent, therefore, selling in to rallies may be the order of the day. Later in the afternoon, the Fed’s Beige Book report will be released which gives us a clue on business confidence around the country. Considering the fact that Bernanke is already familiar with its contents, and he isn’t signaling any stronger to the easing side of the ledger, this may give credence to the notion of dollar strength.

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.