Bernanke's Bleak Outlook Could Send Dollar to New Lows

Fed chief Bernanke’s testimony before the US Senate Banking Committee today has indeed sparked off big moves in forex and stock markets, as I warned yesterday. Unlike previous testimonies, Bernanke didn’t mince his words that much this time, saying that there are “significant downside risks to the outlook for growth” and “upside risks to the inflation outlook have intensified.” His much-anticipated speech came hot on the heels of the aid given by the US government and the Fed to Freddie Mac (FRE) and Fannie Mae (FNM). Bernanke also said that “helping the financial markets return to more normal functioning will continue to be a top priority of the Federal Reserve.” He attributed the increased economic downside risks to “the possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets”.

Yes, it is a starkly gloomy picture of what is going on with the US, the world’s biggest economy. All in all, very bearish comments; one can sense that he has shifted from plainly reassuring the financial markets to giving a realistic overview of what could be tipping the US into recession.

Bernanke said that although the weak dollar has “contributed somewhat to the increase in oil prices”, the latter is mainly driven by basic supply and demand. When asked whether he is comfortable with the current weak dollar levels, he didn’t answer directly, but instead said that he expects the economy to strengthen next year and in doing so support a stronger USD ahead.

Will people buy that? When all we see is one financial failure after another? Can he truly expect that to happen in such a short period of time?

The Fed is not likely to raise interest rates higher this year in the midst of such a negative outlook. In fact, traders are now pricing in a 36% chance of the Fed raising rates in December, down from 60% initially.

US Retail Spending Down

US data released today was mixed but generally on the weaker end. US retail sales increased by 0.1% in June, far worse than the 0.5% increase expected by most. The numbers are disappointing because it means that there has been little positive effect spilled over into retail spending even though Americans were given tax rebate checks since late April. According to the Treasury Department, $91.83 billion in payments were given out between April 28 through July 11.

Shakeup In Forex Markets

We could see the beginning of another phase of fresh US dollar weakness in the forex markets. It may be better to sell into USD rallies and ride on the bearish USD momentum.USD/CHF fell to a near three-month low, breaking sharply below the triangle on the chart to an intraday low around 1.0010. If 1.0000 is broken, the currency pair may target 0.9960, 0.9930, and then towards 0.9890. Selling pressure may step in around 1.0100-20.

Euro will emerge the winner against the dollar, but it is still a question as to how high it can rally, given objections of a strong Euro by European ministers and a weaker-than-forecast ZEW survey. Even so, a high Euro can do some good in mitigating the effects of high oil prices in the Euro area. EUR/USD rose to a record high today, rallying to an intraday high of 1.6040. Nearest support is around 1.5840.

GBP/USD hit a near 4-month high today, rising more than 200 pips to 2.0155.

Economic Calendar For Wednesday:

German CPI 0600 GMT

Swiss retail sales 0715 GMT

UK claimant count 0830 GMT

Eurozone CPI 0900 GMT

US CPI 1230 GMT

US TICS 1300 GMT

US industrial production 1315 GMT

Bernanke Gives Semiannual Monetary Policy Testimony at House 1400 GMT

US FOMC minutes of Jun 24/25 meeting 1800 GMT

Comments

[zooey]

Good job.The speech BB gave was a shot of the truth much missing in his prior utterances. It appears that he has settled in for a recession and some rather uncomfortable inflation. That is a problem for more than the dollar, and American politics; it also threatens global welfare. This could be the first admission that globally things will get ugly. The G8 Summit seems to have avoided that issue entirely which means it was too difficult for open debate. We should be warmed by all of these events things are obviously more serious that we have been lead to suspect.

[Value ValueValue]

Any evidence that charts ever predict anything?

[EUARTE]

My gad! The man is given credit for being honest. This means that in the past he was evasive at best. That is not what we pay him for. We allowed the witch doctor to do this for around 20 years and now we have this horrid result. Well, let's continue the praise for it will encourage him to continue in this (I think).

Where was support for the dollar? Even in tough times a government can and should have a strong reliable currency. The excuse is it may push more financial institutions under. Ben, they will mostly go under during the recession anyway. Let us, in an orderly way, clean these institutions out of the market place. It is called capitalism. Or are we protecting politcians cash cows?

Well lets see how much more the dollar goes down this week....and next...and