Yesterday's risk appetite in foreign exchange markets appeared to be pared back this morning although stock markets have continued to make modest gains. The moderately better tone of the USD was driven by a press article written by Fed Chairman Bernanke in which he listed several ways that the Fed could stem inflation potential after what is likely to be an ''extended period'' for policies aimed at restarting lending.
Sterling came under pressure from a BBC article based around an interview which the Debt Management's Office Stheeman which concludes that it may become more tricky and expensive for the government to borrow.
From the markets' point of view the Bernanke article has deflated the importance of this semi-annual address to Congress today. The markets have been hoping that Bernanke would use this address to outline more detail on how the Fed intends to exit from its current accommodative policy stance, in particular QE. In effect, Bernanke has now provided some detail and the slightly firmer stance of the USD suggests that this is a step in the right direction in displacing concerns that QE will ultimately result in a significant increase in inflation.
EUR/USD has edged back to the 1.4220 area, though it is little changed from last night's close. The USD has also climbed against GBP, the AUD and the NZD.
UK news this morning has been less kind to sterling. UK Public sector net borrowing has been announced at GBP13.0 bln for June. This is lower than the market median but still represents a jump from GBP7.5 bln in June 2008. The BBC article focuses on the huge GBP220bln of gilts that need to be sold this year and the response from the CEO of the DMO Stheeman that overseas demand is supporting prices. On the assumption that the BoE's asset purchasing scheme is also supporting demand the article draws the conclusion that if QE is reversed at the same time that investor appetite for fixed income falls (in a response to a general drop in risk aversion stemming from improved economic prospects), government borrowing may become more expensive. Cable has pushed lower from the European open, so far finding support in the 1.6400 area. EUR/GBP has moved back above 0.8660.
While Bernanke may have reduced the significance of his address this afternoon, the markets will continue to keep a close eye on the rhetoric the Fed President. In particular the market will be looking for any clues with respect to the timing of any policy tightening though such indications could prove to be sparse. The ABC Jul consumer confidence data is due this afternoon. The Bank of Canada is expected to keep interest rates unchanged at today's policy meeting. A cautious tone is expected with respect to the economic outlook though there may be room for some more upbeat references. Some risk is seen that the BoC could try and talk the CAD lower. This would put the CAD on the defensive though USD/CAD is presently trading little changed from last night's close.
