Bernanke Comments Prolong USD Strength

The US dollar continued its recent run of strength yesterday after testimony by Ben Bernanke confirmed the FOMC will look to reduce the rate of asset purchases in the US economy should a continued improvement be seen Ben Bernanke said the FOMC could slow the $85bn a month pace of asset purchases “in the next few meetings” if the labour market is strong.

Repeated good data of late and renewed dovishness from other central banks such as the ECB and the Bank of Japan has largely been the driver of this USD strength. You would have to say that there is little to stand in the way of it at the moment.

Certainly sterling will not be standing in the way if it continues to post retail sales figures like it did yesterday morning. Once again it was poor weather conditions that the 1.3% decline in sales was blamed upon; not original but probably right. We did see the lowest level of food sales for 10 years in April for example.

Put together with the recent drop in inflation and the arguments around further stimulus will only increase if this blip becomes a trend. GBP was subsequently one of the worst performers of the session yesterday.

Yen has strengthened this morning and Asian markets have seen a huge sell-off following poor Chinese data overnight. Manufacturing in the world’s engine room contracted for the first time in 7 months. Manufacturing PMI as compiled by HSBC fell to 49.6 in May and comes less than a week after the Chinese Premier made it clear that he was reluctant to add stimulus to the economy.

Monetary policy is loose globally because fiscal policy is so tight; improvements on either lever seem unlikely in China however and lower growth expectations will begin to be the order of the day.

Data today is chock full of meaning with advance PMIs from France, Germany and Eurozone as a whole, while the UK is due its 2nd reading of GDP for Q1. We round out with US initial jobless claims and sales of new homes stateside.