Surprisingly hawkish comments from Fed Chairman Ben Bernanke have caused a massive dollar selloff and erased weeks of EURUSD losses in just a matter of hours.
Turbulence continued throughout the currency markets in the wake of Wednesday’s surprisingly dovish Q&A session with Fed Chairman Ben Bernanke. A massive selloff befell the US dollar (USD) after the Fed chief quelled any speculation of a quick exit from monetary accommodation.
Speaking in Boston yesterday, Bernanke stated that the Federal Reserve was failing on both of its core mandates, and that inflation was too low and unemployment too high. The comments indicate that monetary accommodation will continue for the foreseeable future.
Most notably, however, Bernanke warned that "if financial conditions were to tighten to the extent that that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that."
The EURUSD skyrocketed in the wake of these words, rising more than 400 points before pausing for breath. The massive short squeeze occurred during the low-liquidity Asian session and no doubt exaggerated the move as traders scrambled to cover their positions. The euro (EUR) effectively recovered several weeks’ worth of losses in only a matter of hours.
Bernanke's dovish slant was particularly surprising given his much more hawkish posture at the Federal Open Market Committee (FOMC) press conference just a few weeks ago, and that has created tremendous confusion in the markets as traders try to ascertain the Fed’s next policy move. From Bernanke’s remarks yesterday, it became clear that the Fed does not want the market to "jump the gun" and price in too much tightening too soon.
Yesterday's Q&A session may have been designed to counterbalance some of that market hawkishness and weaken the dollar, which has appreciated rapidly over the past few weeks and nearly reached yearly highs against the euro. The swift correction in EURUSD took the pair all the way to 1.3200, but it has since retracted a bit and settled near 1.3000, which is likely to be the equilibrium figure for the near term.
Watch for Wide Ranges Today
Elsewhere, the Australian dollar (AUD) displayed some relative weakness after the release of the latest employment figures, which showed a mixed picture on the labor front. Employment rose by 10.5K in June, but the headline data was deceiving because the gains were all driven by part-time jobs.
On a full-time basis, jobs actually declined by -4.4K, adding to speculation that the Reserve Bank of Australia (RBA) may be forced to lower rates again in the wake of this labor market slowdown. AUDUSD tried several times to clear the .9300 level, but ultimately failed. The pair remains mired at the .9200 level in morning European trade.
In North America today, the economic calendar is quiet with only weekly jobless claims due out. After yesterday's fireworks, some consolidation may be due. However, with volatility markedly higher, the ranges today could be very wide, especially as EURUSD trades around the key 1.3000 level.
By Boris Schlossberg of BK Asset Management