Thursday, 26 January 2012

Daily Forex Brief London: Thursday 26th January 2012

In a surprisingly (but also refreshingly) candid admission, Fed Chairman Bernanke declared last night that another round of quantitative easing may well be necessary to alleviate "high and persistent unemployment in an underperforming economy". With inflation still low and Europe a potential drag on the economy, the Fed Chairman clearly feels that more asset purchases are a risk worth taking if it helps the recovery become more self-sustaining. Also disconcerting was the fact that Fed officials lowered their growth expectations for this year, a shock for many who had become more confident in the outlook for the US economy. Despite recent pronouncements from various Fed officials suggesting that more QE may well be required, Bernanke's statement caught dollar longs completely unawares, with the dollar index down more than 1%. For the army of euro shorts, there was an even greater flurry of position-squaring, with the single currency soaring to 1.3125 after languishing under 1.2950 at the start of the New York session. Bernanke's dovish tone helped both stocks and bonds, with the S&P up 2% from the low for the day and the yield on five-year treasury notes falling to a record low of 0.76%. Big Ben did the gold bugs a huge favour as well – the price is above USD 1,710 this morning, up from USD 1,650 before his statement. QE is becoming the preferred tonic of choice for policy-makers – both the Fed and the MPC signalled their intentions to use it again yesterday.

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