NEWS / Foreign Exchange

Bernanke caps EUR/USD on the day

• Treasuries disappointed by Bernanke
• European bonds extend their fall
• Bernanke caps EUR/USD on the day
• Berrnanke doesn??™t fully confirm investors??™ hope

On Wednesday, the EUR/USD pair was hardly changed despite some intraday movements.

The February US durable goods orders disappointed, as the orders failed to make a significant rebound from the prior month??™s plunge of 9.3% M/M. In February a rise of only 2.5% M/M was recorded. This put the dollar under some pressure intraday.

The testimony of Fed??™s Bernanke before the Joint Economic committee was the long awaited key item of the day. He acknowledged that the turbulence in the housing market may cloud the economic outlook, but he stressed the price pressures in general. This may show the Fed is not that keen yet on cutting rates and may still have something in store.

On the analysis of the testimony, the dollar managed to recoup some of the lost ground. The pair returned lower to the 1.3330 area. We wouldn??™t see it as a strong rebound though, more some slight relief in a very short-term horizon.

We still have worries about the US economy, which the durable goods orders also show. Besides, the situation with Iran is still close to explosive and is also a risk to take into account and make investors wait before buying dollars.

The EUR/USD upside could still be favoured in a buy-euro-on-dip scenario. This is kept in place as long as the pair can manage to stay above recent lows at the 1.3260 zone.

USD/JPY dropped back during yesterday??™s trading from the 117.60 zone to the 116.40 area at one stage, to close the day at the 116.80 area. This morning the pair is in the 117 zone. Bernanke??™s bias for inflation clearly couldn??™t help the dollar against the Japanese currency.

The Iran/hostage story is still making headlines, with both sides trying to prove their side of the story. A captured UK military woman admitted having trespassed into Iranian waters. This ???confession??™ is sceptically received by the UK as coercion. The UK officials maintain they were well in Iraqi waters. In the mean time, the US tries to calm things down saying there is no escalation in the relations between US and Iran. The US is holding naval exercises in the Gulf nevertheless at this moment despite the fragile situation.

Still, a potential escalation of this conflict is seen as upping global risk and creating risk aversion. This is making some investors wary right now and triggers a bid for the yen.

This morning, two new BoJ board members were approved by the lower House. The upper house is expected to confirm later today or tomorrow. The two men are Kamezaki and Nakamura. They both come from the business side, respectively form Mitsubishi corp. and the Mitsui OSK group. Nothing is known though on their monetary policy views at this stage, as neither has publicly made comments on the economy or policy in the past.

Data were mixed in Japan this morning, with much improved consumer confidence, but retail sales unexpectedly dropping 0.2% Y/Y.

The recent USD/JPY price action again confirms the sideways stance for the pair, as we see more action between the high at the 118.50 zone and the recent lows at the 115.16 area. It will be just as difficult to break the downside, as signals coming from Japan show no appetite for any yen strengthening.

The EUR/GBP pair laid down an almost sideways picture yesterday, with only a slight dip from intraday levels at the 0.6790 zone towards the 0.6780 area.

Today, developments on the Iran front will be followed with great attention. However, the impact on sterling sentiment hasn??™t been all that much. The forex markets have reacted with some calm, with most of the impact seen in some so-called safe havens at this stage, namely the yen and the Swiss Franc.

Today, the market w ill be taking a look at Fin Min Brown??™s outlook for the economy. At noon, ECB??™s Trichet also speaks. UK lending data will be scrutinized as well.

We hold on to the view that the FX market has been too negative on the UK economy and the sterling and this could be reversed. If the Iran story is allowed to cool down, this could see a return to the small sterling rebound, we saw just before this issue. This seems like a buy-sterling-on-dip opportunity.