More hawkish words on inflation

Forex News: More hawkish words on inflation from Fed chief Bernanke, which should underpin USD going forward; USD/JPY already ticking up on comments, to around 106.65 vs 106.35 earlier. Says recent energy price gains have raised inflation risks and Fed "will strongly resist" any erosion in long-term expectations for prices; shows again the focus on inflation expectations, and the desire to prevent these from getting out of hand. Also shows how Fed is shifting focus from growth back to inflation; Bernanke downplays sharp rise in May jobless rate, saying while it is "unwelcome," economic risks have actually lessened in past month. May keep alive talk of Fed rate hike as soon as October.

Paulson is upping the ante in regard to "usual hollow comments" about strong USD policy, while recent comments from Bernanke suggest a more complex story behind closed doors, says Sonray chief economist Clifford Bennett; "nevertheless, the recent euro trading range is likely to hold, and further dollar falls are likely." Interest rate yields remain key to FX traders, as shown by GBP action last 24 hours; while other currencies fell vs USD after Paulson comments, GBP on back of hawkish data stayed at highs. "The market is responding skittishly to any news at the present, and no short term trader wants to be short the dollar when the rhetoric against further dollar decline is intensifying. (But) it is a different story for the large institutional and global fund managers, and also for some central banks, who increasingly recognize the euro as the world's new reserve currency." Any dips in EUR/USD toward 1.5500 or 1.5400 will get large buyers; "what Paulson's comments do is for a time entrench the bottom of the short term" USD range near 1.5800-1.5900 vs EUR. Overall story remains EUR/USD targeting 1.6400 in near term and perhaps 1.8500 in 4Q08/1Q09.

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