The Fed's appreciation of the growth needs and the current benign inflation forces in US was obvious in Bernenke's testifying which has shown that the Fed will endure as much as it can for stimulating growth hoping for tame inflation to do expecting that it will be well contained over the long term getting over the current rising of commodities and energy prices.
The greenback came under pressure across the broad from this talking which ensured the Fed's keeping of its QE policy as long as it can expecting the labor market to take years to get over the current struggling phase of low growth rates can not give the trust to the employer to add more jobs.
Dow could make a new year high again at 12254 but it has closed adding just 6 points as there was no clear direction in the US equities markets after creeping up in the recent period underpinned by easing of tension in Egypt could bring back confidence in risky assets, After the Egyptian street has found in changing the leaders of the national democratic ruling party an open door for discussions with all parties in Egypt even the Muslim brothers lightening the pressure on Mubarak from US and Europe to quit immediately in a fast way can put Egypt in mysterious ways. It looks currently that he is the best to reform as he is leaving anyway and modifying the constitution of the presidency terms fulfilling the demands of change in the rest time of his leading will not take advantages from him. It was a smart move even it was not directly required this time by the uprising crowd but this does not object that the position is still open in Egypt.
The European equities markets are still following the US market having a quit session after it could cover too the losses of the credit crisis which reached its bottom on 9 March 2009 after aggressive falling of the assets prices has been triggered by the collapse mortgage market in US threating the creditability of its financial sector with the bankruptcy of Lehman brothers.
While the Asian stocks indexes are still under pressure from the unexpected Chinese decision of hiking the yearly lending rate by 25 basis points to 6.06% from 5.81% for curbing the inflation accumulating pressure at the current high oil and commodities prices which can lower the demand outlook of them and also the Australian dollar and New Zealand Dollar too as the nearest commodities markets to china.
The single currency came under pressure this week again by the falling of December germane industrial productions by 1.5% while they were expected to be up by .2% from decreasing by .6% in November and these dovish data came a day after the falling of Germany factory orders by 3.4% monthly in December from gaining 5.4% in November while the market was waiting for shrinking by 1.4% to show easing of the demand of capital good from Germany which can slow the growth of it. The single currency has been already undermined by last week Trichet's comments which have referred to moderate inflation upside risks over the long term after the ECB decision to keep the interest rate unchanged to reducing the market discounting of having a close interest rate hike for fighting the inflation after Jan EU CPI which has reached 2.4% y/y well above the 2% target of the ECB and so the single currency could not have the ability to fight for having a place above 1.379 versus the greenback breaking below 1.358 and it is now trading above 1.36 after finding support just above 1.35 psychological level but the breaking of this level can open the way for testing 1.335 then 1.326 and the falling of this level too can open the door for 1.309 and then the recent bottom of the pair at 1.287 level where it could rebound from by repeated Portuguese denying of the need for this made package by European countries and the IMF and the Japanese promises of buying European bonds this month could help it to rebounds fueled by markets cheeriness of successful bonds auctions in Portugal , Spain and Italy underpinned by The ECB members appreciation of building inflation pressure in the Euro zone which drove the pair up to 1.386 by their recent meeting.
The single could get over 1.37 after it could rebound with the recovery of the investors' risk appetite at 1.3505 versus the greenback earlier this week which is still supported by the rising of the treasuries yields and the increased demand for borrowing while the US economy is looking better in the recent months despite the struggling of its labor market as we have seen by the end of last week the release of US Jan non-farm payroll adding just 36k while the market was waiting for 150k jobs to be added with declining of the unemployment rate to 9% from 9.4% while the market was waiting for rising to 9.6% but since the strong release of January ISM Manufacturing index which jumped to 60.8 while the market was waiting for 58.2 from 58.5 in December the confidence in the US economy is getting momentum adding to the gains of its dividends driving the treasuries yields up reinforcing the business spending trust which has been tempered recently by the concerns about the geopolitical situation in the middle east worrying about the oil supplies from the Arabian rich countries of oil through the Suez channel after the tensions have extended into Egypt brining back the oil prices above 100$ a barrel supporting the gold as a safe haven stance of the money value versus the higher inflation outlook to rebound from 1306$ trading currently above 1360$ trying to get over 1380$ after it was under pressure because of the increased optimism of having better growth rates in US this year can make the investing in the greenback rewarding with tame inflation pressure can help the Fed to keep its easing borrowing plans unchanged as it has done by the end of last month giving just reference to the rising of the commodities prices just as BOJ which is fighting deflation has done until now betting on its inability to move up the inflation over the long term in US as it was clear in Bernanke's last talking.
After the cable had got a strong push from UK Service PMI of January rising above 50 again into the expansion territory at 54.5 above the market expectations of 53.5 from 49.7 in December jumping to 1.6275 last week, The cable eased back from it unable even to get the formed resistance at 1.6296 which has been reached in the beginning of last November when the greenback was under pressure from the Fed's decision to add another 600b$ in another step of its QE policy for stimulating the economic growth in US but this does not object the British pound which is still taking advantage from the increased market speculations of having new adopted tightening stance from the BOE for fighting the inflation which has been surged recently with UK CPI index reaching 3.7% yearly after the recent MPC meeting minutes which have shown stronger than expected appreciation of the inflation upside risks giving another vote to sentence who was calling for hiking the interest rate by .25 from the MPC voting member Mr. Martin Weale to be 6 to 2 to 1 decision of keeping the interest rate unchanged at .5% and its buying bonds plan unchanged at 200b Stg instead of 7 to 1 to 1 in their earlier meeting as Possen is still favoring increasing of the buying bonds plan but in the same time, the market is still appreciating the growth downside risks which face the UK economy and drew UK Q4 GDP into the negative territory at -.5% quarterly showing emerging of the stagflation risks capping the MPC from hiking the interest rate in the well required pace to anchor the inflation fearing of accumulating of these risks facing the growth by tackling further the investments which are needed for spurring the economy , so it looks that the only available option to the BOE currently is to let the pound appreciate for containing the inflation helping the market trust in it. So, God willing, it is important today to wait for its interest rate decision which will be published after both of UK manufacturing and industrial productions of December which are expected to be up monthly by .5% from .6% and .4% in November.
FX Market Strategist
Walid Salah El Din