Dollar declines accelerate against the yen as the market deems Fed Chairman Bernanke??™s inflation vigilance to be gratuitous relative to the emerging deterioration in subprime defaults. His reiteration that the Fed??™s ???predominant policy concern remains the risk that inflation will fail to moderate as expected??? and that inflation remains ???uncomfortably high??? has been offset by his remarks stating uncertainty in the subprime mortgage problems and the risks of spillover from the slowdown in the auto sector and overall business spending.

Bernanke goes on to mention the impact of tightening lending standards on reducing housing demand as well as rising delinquencies, noting the ???severe financial problems for many individuals and families??? but later concludes that the problems are likely to be ???contained???.

While the Fed says its predominant policy concerns remains inflation, the market??™s predominant policy growth remains housing and a faster slowdown in economic growth. This convergence is likely to maintain the normalization of the yield curve, thereby opening the way for rate cuts as early as Q2. In currencies, unwinding of higher yielding plays remains the order of the game amid lackluster risk appetite emerging from the impasse in Iran and uncertainty with US mortgage lenders and homebuilders.

Market reaction

Today??™s Bernanke??™s testimony as well as the market reaction was in line with our morning analysis, which stated ???Bernanke??™s inflation vigilance may be overshadowed by his housing concern???. More specifically, our morning note also mentioned ???USDJPY eyes 116.40??? which is the session low of the pair following the decline from 117.70, while also predicting that EURUSD will be capped at 1.3370. The chart below shows USDJPY supported at the 4-week trend line support of 116.40, at which point bidders can target the 117.20s. But the yen rebound is not over, as traders will seek ways to assault the 116.40 towards the 115.50 support on what we deem to be inebvitable resurgence of risk aversion.

EURUSD expectedly failed to break above 1.3370 resistance as the euro was pressured down by the selloff in EURJPY. Support seen standing at 1.3320s, underpinned by 1.3280. Interim resistance stands at 1.3350, followed by 1.3380.

Our lack of optimism for cable remains intact as cable broke back below 1.9650, heading to our projected support of 1.9620 and 1.9580. Rallies seen capped at 1.9680.