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The forex markets were jittery today as Fed Chairman Bernanke confessed to what he might or might not do. Some, who apparently had access to the prepared text of his testimony, reported there would be no tapering off of the current rate of money addition -- $85B per month.

Premature tightening risks the slowing or end of the current recovery, it was reported. Naturally this weakened the USD, as traders felt the increase in the money supply was bearish the USD. Then in his live testimony Bernanke hinted at a possible tapering in the amount of the monthly QE. Adding to the confusion was NY Fed President William Dudley, who claimed the Fed needed three or four months to measure the fiscal drag caused by reduced federal spending.

Was the conflicted testimony by Bernanke premeditated? Probably, as were the additional comments by Dudley. The market, however, has responded and sent the USD higher. Amazing how sensitive these markets are to just a hint of tightening.

In Bernanke's prepared remarks, he expressed concern about the damage caused by the high rates of unemployment. True, the drop in the participation rate of the U.S. employed is a concern, but 7.5% is far less that some European countries.

Recently George Friedman, the founder of Stratfor Global Intelligence, made these observations after traveling in Spain. Friedman is an interesting and compelling writer. The entire article is worth a read, but I wish to mention a few of his thoughts.

Driving on a four lane highway from Granada to Madrid, he noticed there was almost no traffic in the middle of a sunny weekday. And there was almost a complete absence of trucks. He says:

"The oddest moment came when we reached a tollbooth not too far from Madrid. There was only one booth open and when we pulled up there was no one in it and no coin or credit card slot. We waited, then we left. Perhaps the attendant was in the bathroom. Perhaps the revenue didn't justify paying a toll taker. Perhaps this was one of the austerity measures they had taken."

The austerity inspired recession has taken its toll in Spain. With unemployment 27% and the petrol price at 1.40 euros per liter, there is little pleasure driving. Consumption has been cut to bare necessities. Hence the absence of of commercial traffic.

But it is worse. The youth unemployment, under 25, is about 60%. This is a terrible waste, as Bernanke would say, and a potentially explosive situation, as Friedman says:

"This -- being the victim in personal calamity shared by half a generation -- is the foundation not just of political instability but also for the politics of rage. The older middle-class citizens, with the lives they thought they had secured shattered, hurled into the ranks of the permanently impoverished, represent the vanguard, if you will. But those who will never live the lives they thought they would, they are the explosive mass."

While the European Commission wants to give France and Spain more time to pay their debts, "the German government wants them to speed up," reports Der Spiegel.

More austerity is the German response to Southern Europe's difficulties. But the problems are complex. Friedman has this observation:

"Europe does not know how to live with a Germany that uses the free trade zone to surge its exports while blaming Europe for being lazy and shiftless. Germany does not know how to live with a Europe that does not see that all of its problems are due to its lack of industriousness."

If you have followed Stratfor's work for years, as I have, his reports are not written for headlines. Rather, they are carefully considered with regard to historical geopolitical events. The longer Europe dithers, the closer we are to a black swan event that can wreck havoc in many markets.

The EURUSD had been attempting to rally after the recent retreat to the 1.28 handle where buying interest emerged. Bernanke's prepared speech, which sent the pair close to the 1.30 level, proved to be a selling opportunity, but you had to be quick.

Currently things are quiet in the eurozone. There is some alarm that Brussels bureaucrats retire with pensions that are in excess of £100 per year. The Brits are tired of the ever increasing costs of the intrusive government, but they continue to grumble and pay. Perhaps the financial transaction tax, when instituted, will cause a crisis. Years ago, the increase in the price of tea in America resulted in a profound change.

We remain bearish on the EURUSD (FXE, UUP, UDN) and look to sell strength.

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Source: Bernanke's Comments Boost The USD, Hurt The Euro