Risk assets continue to rally after Bernanke's dovish comments

Tom Tong12/Jul/2013Currency Updates


Yesterday the United States governments posted an unexpectedly large budget surplus for June. This is another sign of the rapid improvement of public finances that is happening in America. The surplus stems from a rise in tax revenue, public spending cuts and large payments from government back mortgage companies. In total these helped the US to bring in $117 billion more than it gave out. The expected figure for last month was $39.5 billion and as such the real value was the largest ever on record for June.

In the equity market, the Dow Jones and the S&P hit record highs after Bernanke’s discussion on Wednesday concerning Fed monetary policy. Bernanke believes that the US Jobless rate of 7.6 % overstated the health of the labour market and that a “highly accommodative” policy may be necessary for the foreseeable future.

Today there is a spate of tier 1, 2 and 3 data out in the US. Most important of all is the Reuters/Michigan Consumer Sentiment Index. This is a survey of personal confidence in the economy and shows a picture of whether or not consumers are willing to spend money. The previous figure was 84.1 and the consensus for this month is 85. A high reading shows positive consumer behaviour whilst a low shows negative. In addition to this there are numerous Producer Price Indices.


Sterling made gains against USD as comments from Federal Reserve policy makers caused investors to push out expectations for when the central bank will reduce stimulus. There were no other data releases of note to come out of the UK yesterday and nothing on the table for today.

Mark Carney will align the BoE policy closer to the Federal Reserve next month by tying guidance on interest rates to economic developments. We have seen the Bank of England Governor push the central bank into new territory and may go even further next month to review the use of thresholds for policy.

The MPC said investors had priced higher rates earlier than policy makers anticipated – pushing the pound and gilt yields lower and signalling Carney’s intention to make his mark.

George Osborne says he will not need to raise taxes to meet deficit reduction targets after the next election, and that original plans to cut the deficit with 80% spending cuts and 20% tax rises were only ever a “guide”.


A pretty uneventful day for the EUR yesterday. We saw EUR weaken against USD slightly, how ever it failed to break through the 1.30 psychological support. High tier data out of the euro zone has been scarce this week and yesterday was much of the same. We saw some medium tier data released from Germany and France . German wholesale prices showed a 0.4% decrease instead of the expected 0.3%.

Meanwhile the ECB has confirmed interest rates would remain at their current level as long as inflation remains moderate. Abandoning its policy of never pre-committing on future rates, the ECB said last Thursday it would keep rates at their current record lows, or even lower, for an extended period. The first signs of so called forward guidance.

Data out of the euro zone today today is the industrial production results for May.


Written by Tom Tong

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