US dollar in focus ahead of Bernanke testimony

The main theme in the FX space is mild US dollar weakness heading into Federal Reserve chairman Ben Bernanke’s testimony.

On the economic front we had CPI up 0.5% and slightly ahead of estimates, while industrial production and the housing market index exceeded expectations. Surprisingly, the US dollar remained relatively subdued as investors position themselves for Fed chief Ben Bernanke’s testimony ahead to Congress.

Following Mr Bernanke’s comments at the Q&A session last week, a lot of analysts continue to feel he will sound the same tone regarding the Fed remaining accommodative for the foreseeable future. However, the recent recovery in data is likely to be acknowledged and in turn may result in an adjustment to asset purchases.

With the US dollar index (DXY) dropping below 82.50 through US trade, we are starting to feel the market might be a bit too short heading into the testimony. This tends to result in a squeeze higher, with a high likelihood that Mr Bernanke won’t be as dovish as the market expects.

AUD/USD has been one of the best performers in the risk space over the past 24 hours, in a move triggered by yesterday’s RBA meeting minutes. The pair has lunged to $0.925 and looks like it is headed to $0.93 in the short term. The region between $0.93-0.9320 is where we feel the pair might encounter resistance in the short term. Mr Bernanke’s testimony might be a trigger for a USD recovery and in turn an AUD/USD fall.

USD/JPY dropped to 98.89 as the USD lost ground and hasn’t reacted much to the BoJ’s monetary policy meeting minutes. GBP/USD pushed higher overnight but has since pulled back ahead of a fairly busy day on the economic recovery. At 18:30 AEST today we get the BoE minutes, UK jobs report, while as mentioned Ben Bernanke will dominate traders’ thought process. Selling into strength might be the preferred strategy, particularly after the dovish statement from the meeting. EUR/USD brushed off a disappointing German ZEW economic sentiment reading (36.3 versus 39.8 expected) and managed to print a high of 1.318. There isn’t much on the eurozone’s economic calendar today but investors should keep an eye on Germany’s 10-year bond auction.

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