Yesterday's drop in the US consumer confidence indicator has significantly soured the mood in the market.  Equity indices are down across the board and oil prices have given up some of their recent gains as the market faces the likelihood that the US recovery is still on shaky ground.  The JPY surged in early London hours with EUR/JPY falling back to 121.60 before bouncing.  USD/JPY remains below last night's close near 90.10.  

The force of the US data disappointment has been reinforced by yesterday's setback in the German IFO index and by this morning's news of a softening in German Mar consumer confidence survey to 3.2 from 3.3 in the previous month.  Coupled with yesterday's dovish leaning from BoE officials and there is clearly plenty of evidence to suggest that the Western world is still in need of policy support.  To this end, the market should be comfortable with the view that Bernanke today is likely to stress that Fed rates will remain low for an extended period.  While last week's discount rate hike caused a flurry of excitement over the prospect of an interest rate hike, the poor US consumer confidence release should have served to drive home the point that this was just a technical move.  Benign US inflation, elevated unemployment and a vulnerable consumer sector suggest little chance of the Fed hiking ahead of Q3.  That said Bernanke is likely to acknowledge that there are signs that the recovery is gaining ground. This type of statement combined with a reassurance that rates will stay low would likely allow a little support to equity markets and risk assets.   

The USD may not find any additional support from Bernanke today, but EUR/USD is likely to remain under pressure from European news.  The fact that Greek unions are today striking against further austerity cuts and that Spanish workers are becoming increasing agitated by pension reform is increasing the possibility that either or both countries may fail to bring its budget deficit in line.  Even if there is a bailout from the EU, this will not fix any of the structural budgetary short-comings of these countries suggesting that a bailout will not absolve the EUR of continued downside pressure.  Given that a hand-out currently remains elusive, the worst case scenarios that Greece could be forced out of EMU or may default on some debt cannot be ruled out.  Early USD buyers in Europe this morning ran into support below USD1.3520.

Comments from the BoE's Posen this morning maintained the dovish view promoted by BoE officials yesterday and suggested that more (QE) could be done by the BoE if the risk to growth were to the downside.  The latter remark helped undo cable's morning recovery.   Some support for the pound had come from the results of today's 2019 gilts auction which managed a 2.25 bid/cover ratio; the recent move higher in yields having attracted buying interest.  The auction result will help offset fears that the UK will struggle to place its debt this year.  

Aside from Bernanke's speech, US Jan new home sales data are due.  

Jane Foley
Research Director