U.S. stock indices are trading flat this morning ahead of the U.S. opening. Investors seem reluctant to take a side ahead of today’s testimony by Fed Chairman Bernanke. Today’s emphasis will be on jobs and the Fed’s exit strategy. Bernanke may be asked to explain how the Fed plans to withdraw stimulus and raise interest rates without shocking the financial markets. Dovish comments by Bernanke are likely to decrease demand for higher risk assets while putting pressure on equities. Hawkish comments, or hints at a rate hike this year could also trigger the start of a sizeable correction. The only thing investors can count on today is volatility.
Trading has been mixed overnight in the Treasury markets following a strong rally on Tuesday. Yesterday, investors bought T-Bonds and T-Notes after the release of less than stellar U.S. economic reports. Today, traders will react to any comments by Bernanke regarding interest rates. Talk of tightening will pressure March Treasury Bonds and March Treasury Notes.
If Bernanke’s testimony helps the Dollar then look for more pressure on Gold and Crude Oil as traders will begin dumping higher risk assets. April Gold could see a technical bounce following a test of $1088.00 to $1077.80. April Gold could feel the most downside pressure as the charts indicate plenty of room to the downside with 75.29 to 73.99 the most likely targets.
A surprise drop in consumer confidence in the U.S. and an unexpected fall in German business confidence sent the Dollar higher against most major currencies while the Euro weakened. Both reports indicate that there are concerns about the global economic recovery.
The U.S. Dollar is down slightly overnight against most major currencies as traders await Federal Reserve Chairman Bernanke’s semi-annual testimony before the House Committee on Financial Services.
Bernanke will be in the hot seat this morning as he tries to convince Congress that the financial health of the economy is under control. In addition, he will try to build public confidence in the Fed’s upcoming exit strategy. Bernanke’s main job will be to explain how he is going to begin lifting stimulus and raising interest rates without rocking the jittery financial markets. He may also be asked to explain why he hiked the discount rate last week and why this move should not be deemed monetary tightening.
While facing intense scrutiny from the panel, Bernanke will reiterate the Fed’s key positions that financial conditions are improving, inflation is under control, unemployment is too high and that interest rates are likely to remain low for an “extended period”.
The Dollar may see benefits from either a dovish or hawkish testimony. A dovish testimony by Bernanke is likely to be friendly for the Dollar as it may increase demand for higher risk assets. A hawkish testimony could trigger a rally in the Dollar because it will imply that the economy is stable enough to warrant higher interest rates.
The March Euro is trading better overnight. This move is most likely position evening ahead of Bernanke’s testimony. Concerns about Greece’s ability to resolve its budget and debt issues are still having a major bearish influence on the Euro. In addition, the record numbers of short traders betting against the Euro have been reluctant to let up on the selling pressure.
The March British Pound is trading slightly better this morning, but still in a position to test the recent bottom at 1.5352. The charts are indicating more downside potential is likely. Combined with the weak fundamentals, the Pound remains one of the weakest currencies. Talk of a protracted recovery and additional quantitative easing is likely to keep the pressure on the British Pound.
The direction of the March Swiss Franc is up to the Euro. A weaker Euro will trigger more upside movement in this pair as it will encourage the Swiss National Bank to keep on providing liquidity through intervention. A stronger Euro will take the pressure off the SNB to protect its export business through intervention.
The March Japanese Yen is likely to continue to rally if the Fed hints at keeping interest rates low for a prolonged period of time. This news will most likely keep pressure on higher risk assets as it will indicate the economy is still weak. Traders are likely to buy the Japanese Yen for protection.
The commodity-linked Canadian Dollar is down overnight because of weaker gold and crude oil prices. A dovish testimony by Bernanke today could help the Dollar while sending gold and crude oil lower. This scenario will trigger more downside movement in the March Canadian Dollar.
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