The release of Ben Bernanke’s testimony this morning left forex traders confused as ever but avoiding a one directional reaction is most likely the Fed Chairman’s intention. While Bernanke repeated that the Fed may taper QE in 2013 and halt it around mid-2014, he also said the pace of bond purchases is not on a preset course. In reaction, the U.S. dollar extended its losses, Treasuries erased earlier gains and stocks moved higher as Bernanke’s comments failed to harden the market’s expectations for Fed tapering in September. Instead, the U.S. central bank head left all options open by saying that “bond purchases could be reduced more quickly if conditions improve faster or maintained longer if conditions are less favorable.” Taking a flexible approach to his speech on Capitol Hill is a smart and expected tactic. Bernanke needs to appear flexible to Congress and willing to respond to incoming data and adjust the asset purchases as necessary.
We know that the Fed is still not satisfied with the labor market situation and they intend to continue their bond purchases “until a substantial improvement in the labor market outlook has been realized.” In a move to reassure Congress, Bernanke also disconnected tapering with rate hikes, saying that even if their 6.5% unemployment target is reached, it won’t be enough to warrant an increase in interest rates. There are 2 things that Bernanke wanted to avoid today #1 – driving Treasury yields sharply higher and #2 – raising too much concerns in Congress that they would adamantly oppose a reduction in stimulus.
When the testimony officially begins at 10am ET and members of the House Financial Services Panel start to question Bernanke’s plans, traders can expect more volatility in the dollar. Aside from Bernanke’s speech the Federal Reserve’s Beige Book report is also scheduled for release later this afternoon. FOMC Voters Stein and Raskin will deliver speeches around noontime and if these doves question the need to reduce asset purchases, the dollar could extend its slide.