EUR/USD rose 0.25% this morning to a three-week high of $1.3230, ahead of the Fed’s key rate decision and Ben Bernanke’s press conference.
The Fed’s key rate decision is scheduled for 5.30pm (London time). The market expects the ultra-low interest rates to continue until mid-2014 and Ben Bernanke is expected to focus on the more recent weaker economic data at his press conference at 7.15pm (London time). Investors will be reading the Fed’s statements carefully for any fresh clues about QE. With the UK today entering a technical recession, parts of Europe under a severe crisis and the latest batch of weak US macro data, the Fed will be forced to shift its attention back to growth. We expect Mr Bernanke to provide dovish statements and leave the door open for additional quantitative easing (QE). Any additional QE by the Fed will be bearish for the dollar and bullish for riskier assets.
Meanwhile, Germany raised €2.4 billion in a government bond auction today. That was lower than the original target of €3 billion. The bid-to-cover ratio for the new 30-year debt securities was only 1.1x. After the auction, the yield on the ten-year German bunds rose on the secondary market by 3 basis points to 1.73%. Elsewhere, Italy’s ten-year yields fell 4 basis points to 5.64%, while Spain’s ten-year yield fell 6 basis points to 5.81% in the secondary trading.