Bernanke a Dollar White Knight?

Is Helicopter Ben going to crash the party or perhaps become one of those non committal individuals that we are determined not to give up on? Capital markets will be monitoring his, and today’s, semiannual MPR to Congress for any strong indication of an imminent shift in favor of another round of asset buying, specifically after yesterday’s weak retail sales data. Monday’s report showed sales dropping (-0.5%) for a third-consecutive month, forcing some analysts to begin revising their Q2 growth rate down for the US economy (+1.4% from +1.7%). The combination of weak final demand and rapid inventory accumulation does not bode well for future growth. The betting market expects the Fed to adopt his infamous wait and see approach until September. Individuals waiting for a ‘too dovish testimony’ could be disappointed. An inconclusive outcome from the meetings and we should see the greenback drag back some of its lost ground that it has given up in the last session and a half.

Most of the EUR damage was done before this morning’s German ZEW release. Damage in the sense that record short single currency positions are being squeezed and squeezed hard. Is there more to come? Overall, it seems that the EUR has shrugged off the ZEW release itself, which met expectations of a further decline. The market is wholly focused on vulnerable short stop loss positioning or rather more pre-Bernanke position adjustment. Top picking the EUR remains in vogue with investors who are looking to be short or square. Be prepared for more of a squeeze during US open.

German investor confidence declined for a third month in July (-19.6 vs. -16.9) as the euro area’s debt crisis and the cooling global economy dimmed the economic outlook. It seems that the shoulders of Europe, Germany’s economy, which grew +0.5% in the Q1, is running out of steam as austerity measures across Europe and weakening global growth curb demand for its goods and damp confidence. It’s no wonder that we saw the IMF in action yesterday, cutting its global growth forecast for next year to +3.9% from a +4.1% estimate three-months ago. Already we have growth worries in China, US and now Europe. A stronger domestic economy cannot seem to currently offset this scenario. What are we left with, long periods of stagnation? Euro ZEW’s fell to -22.3 from -20.1.

Also having an impact this morning on the UK’s inflation situation is the weather. It seems that washout weather is keeping shoppers at home. Inflation has unexpectedly fallen to its lowest point in 30-months in June (+2.4% vs. +2.8%, m/m) as clothing prices plunged, helping to vindicate the current BoE’s stance in increasing its emergency stimulus this month. The BoE sanctioned a new bout of asset buying to boost the recession hit economy, despite inflation holding above their target rate of +2%. So far this morning Sterling is holding its own and this only because the dollar is weaker.

OANDA’s retail EUR positioning has been long and right. They are now beginning to pare some of those long’s, selling into this market strength, as we settle down to the Bernanke show. Ben has it tough, his testimony comes at a time when many analysts are now slashing their growth forecasts. Himself, Congress and Senate are being held accountable. If they step up to the plate the long dollar positions will once again be scrambling. The record short EUR trades are still in play, now targeting sub 1.22. This overnight bounce is very close to triggering more stop losses around the 1.2330 level, certainly an ideal target to square some longs, if you had any, ahead of Ben’s speech. The reality seems to be that he will not be giving too much away before the FOMC board meets, everything else is pure speculation!

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EUR Song Remains the Same