Possible FX Market Action Outcomes of Bernanke's Speech on Friday
Fri, Aug 27, 10:21 AM ET, by ForexTraders.com
The Kansas City Federal Reserve is hosting an Economic Symposium in Jackson Hole, WY all weekend. Monetary policy makers will be attending from more than 40 nations in order to debate and discuss the current global economic recovery and brainstorm possible further steps to stimulate the global economy. Federal Reserve Chairman Ben Bernanke will be giving a speech at 10:00 am est entitled, The Economic Outlook and the Federal Reserve's Policy Response. Investors are hoping to get clarity from Mr. Bernanke concerning the Federal Reserve's plan in the near-term for how they are going to deal with an ever-weakening United Sates economy.
U.S. data has continuously disappointed over the last 3 months, and this week was no exception as housing data came out far below expectations, which further confirmed market fears that the economic recovery in the United States is a bit worse than simply "slowing down." The last time Mr. Bernanke spoke publicly was a few weeks ago, and since then economic data has come out steadily below market expectations. Thus, Mr. Bernanke will not have much of a chance to be upbeat concerning the recovery. Thus, the market is not expecting him to be optimistic; instead, the market is really calling for clarity from the Federal Reserve for how they are going to stimulate the anemic U.S. recovery.
The U.S. economy is facing the potentially deadly combination of high unemployment and low inflation. This combination can very easily lead to a deflationary environment, which economists regard as very, very difficult to recover from. Mr. Bernanke is known as a devoted student of The Great Depression, and he has been very clear throughout his tenure as Chairman of the Federal Reserve that he would do all in his power to keep the U.S. economy from entering into a deflationary period. Instead, he has made it quite clear that he is willing to spend whatever amount is needed to keep deflation at bay.
However, his views do not necessarily coincide with other Federal Reserve Board Members. Several Board Members fear the long-term effects of continuously pumping unprecedented amounts of monetary stimulus into the economy, and they are fighting to hold further QE measures back until they are absolutely essential. Mr. Bernanke's view of how to deal with the current economic climate is also diverging sharply from European Central Bank President Jean-Claude Trichet. Mr. Trichet is rather hawkish concerning the economic recovery in the EuroZone and has called for Central Banks around the world to stop injecting stimulus into the economy and instead begin tightening measures. The EuroZone, in fact, is weathering the storms of the Debt Crisis and recession much better than most experts had originally expected.
Thus, you have Mr. Bernanke pitted against other monetary policy leaders. Friday's speech should be a very powerful market mover. Today, most major currency pairs moved in sideways trading action as traders were reluctant to commit in either direction before Mr. Bernanke's speech.
 
If Bernanke Is Not Clear On Fed's Next StepsThis could prove to be quite devastating for risk assets. Equity and commodity markets will most likely sell-off very strong if Mr. Bernanke does not give a very clear plan of action to deal with the current faltering of the U.S. economic recovery. It is now apparent to market participants that the U.S. recovery is in major trouble, and if the Fed remains to sit back and watch developments with committing to a clear path of action, it will most likely severely shake investor confidence.
The direction of the Dollar is not so clear, however. Typically, over the last two years during the global recession, the U.S. Dollar has strengthened tremendously during times of risk aversion, but during the last 2-3 months we have seen the market sell the Dollar at times in expectation of major troubles in the U.S. recovery. If the theme of risk aversion enters the market tomorrow due to lack of clarity from the Fed, we could still see the U.S. Dollar sell-off as investors decide to place their capital in the higher-yielding euro, which at the moment seems to be wading its way through the mess of economic recovery in a much better fashion.
Another possibility is that the U.S. Dollar could sell-off initially if Mr. Bernanke does not appease the market, but in the aftermath of the news, the Dollar could gain incredible strength as investors rush into the safety of U.S. Treasuries. We wrote about this price behavior that has been transpiring over the last few months in a report earlier this week. At times when U.S. news comes out bad, we have been seeing an initial sell-off of the Dollar that lasts for anywhere from 30 minutes to 1.5 hours, but then the market completely reverses, retraces all of the Dollar weakness, and actually moves heavily in the Dollar's direction. If Bernanke Is Clear Concerning the Fed's Next StepsThe market will most likely be a bit relieved if Mr. Bernanke offers a clear and practical plan of action, and the market will most likely move into risk assets, which means the Dollar will drop versus the Euro, Pound, and other major currencies. Equities will most likely find support as well and begin to move higher. The X-FactorPrelim GDP comes out at 8:30 am tomorrow morning. The market will be waiting for Mr. Bernanke to speak at 10:00 am, so the market may not move much as a result of this report if it comes out as expected, or even slightly better. However, if this number surprises to the downside by more than a few tenths of a point, we could see a huge bout of risk aversion flood the market. The main concern surrounding the U.S. economy is economic growth and the possibility of a double-dip recession. If GDP were to come out close to 1%, it could serve to push the market over the edge into heavy risk aversion capital flows.
SDI Glossary: "Debt" Definition
SDI Glossary: "price" Definition
SDI Glossary: "Equity" Definition
SDI Glossary: "the Fed" Definition
SDI Glossary: "GDP" Definition
SDI Glossary: "Monetary policy" Definition
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