Dollar Firm after Bernanke Triggered Rebound, More Upside Ahead

Dollar remains generally firm today after overnight rebound. The disappointment over lack of hints of QE3 from Bernanke sent gold sharply lower and pressured stocks. Gold subsequently breached 1700 level before recovering mildly in Asia. Asian equities are generally weak even though China's manufacturing PMI came in slightly better than expected. Technically, EUR/USD has clearly made a short term top and thus more downside would be seen in near term. Due to the EUR/CHF peg, USD/CHF has likely bottomed too. Meanwhile, even though the picture is less clear against Sterling and commodity currencies, dollar is in favor to extend the rebound against them for the rest of the week.

In the testimony before the House Committee, Fed Chairman Ben Bernanke was less downbeat on the macroeconomic outlook. He stated that 'pace of the expansion has been uneven and modest by historical standard'. Yet, growth in the coming quarters is likely to be 'at a pace close to or somewhat above the pace that was registered during the second half of last year'. He also acknowledged positive developments in the job market including job gains that were 'relatively widespread across industries' and the 'more rapid than expected' decline in the unemployment rate over the past year. More in No Signals Of QE3 Disappointed Investors.

Separately, the latest Beige Book indicated a more positive growth outlook in most US districts. According to the report, economic activity continued to increase at 'a modest to moderate pace' over the first weeks of 2012. Manufacturing activities expanded 'at a steady pace across the nation' whilst activity in nonfinancial services industries 'remained stable or increased'. Consumer spending was 'generally positive' and the sales outlook for the near term was 'mostly optimistic'. There were mixed signals in the job market. While hiring increased slightly across several districts, wage pressures were 'generally contained'.

BoE Weale said he doesn't see there is case for further quantitative easing after the current program completes. Weale argued that recent surge in oil prices and potential wage pressures post a "risk that there may be more persistence to inflation than one might expect at a time of rising unemployment and weak demand". Regarding the economy, Weale said that consumption "appears to be growing again" and "indicators of the state of the economy this year have been more positive for overall gross domestic product growth."

In Europe, Greece parliament approved pension and health care spending cuts by 213-58 votes. Prime Minister Papademos should be well prepared to meet most of the conditions demanded by EU for the EUR 130b second bailout when EU finance ministers met in Brussels today. Papademos pledged the "government will do its utmost to implement fully and effectively both the program and the complementary actions." Regarding Ireland, it's reported that EC could require the country to have further revision to the budget this year as economy deteriorates. That is, the target of EUR 3.8b of tax hikes and spending cuts this year might need to be raised in order to meet the 8.6% deficit to GDP ratio. Yesterday, ECB said it has allotted 529.5B euro of 3-year LTRO to 800 banks in the second three-year LTRO, more in ECB Allotted over 500B Euro in LTRO.

On the data front, China PMI manufacturing rose more than expected to 51 in February. Swiss GDP rose 0.1% qoq in Q4, above expectation of -0.1% qoq. PMI data will be a main focus today with Swiss SVME PMI, Eurozone PMI manufacturing revision and UK PMI manufacturing. US will also release ISM manufacturing. Other data to be watched include Eurozone CPI, unemployment, Canada IPPI and RMPI, US personal income and spending as well as initial jobless claims.