Foreign Exchange Report : Downbeat Bernanke Commentary Sends GBP USD Rate to a Twelve-Week Low

June 23, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Report : Downbeat Bernanke Commentary Sends GBP USD Rate to a Twelve-Week Low

The Pound Euro exchange rate (GBP EUR) is 1.1215. The Pound Dollar exchange rate (GBP USD) is 1.6047. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5201.

Chairman of the US Federal Reserve, Ben Bernanke, used his press conference last night to issue a pessimistic view of the state of America‘s economy.

Bernanke downgraded the Fed’s 2011 growth forecast for the US economy to 2.7-2.9%. The previous estimate had foreseen an increase in economic activity of 3.1-3.3% in 2011. Bernanke observed that the economic recovery had been ‘somewhat slower’ than had been anticipated and warned that unemployment would remain persistently high in the US for the remainder of the year, at least.

The press conference followed the FOMC’s announcement that US interest rates were to remain at a historical low of 0.00-0.25%. Bernanke suggested that rates were likely to remain at this level in the medium term, describing rising US prices as ‘temporary’ and blaming domestic inflation on increasing food and energy costs.

The FOMC also announced that its current $600bn asset purchase scheme would conclude on the final day of June, but Bernanke pointedly made no mention of a new Quantitative Easing scheme. This omission was positive for the US Dollar, as previous global QE schemes have caused currencies to rapidly weaken.

Meanwhile, the minutes of this month’s Bank of England Monetary Policy Committee meeting were published in the UK at the start of yesterday’s European session. The minutes proved to be massively Sterling-negative, with the Pound performing worse than any of the other sixteen most-actively traded currencies on the day.

The minutes showed that only two of the nine-man committee voted for a UK interest rate increase, with new member Ben Broadbent joining the six long-term doves in voting to keep rates on hold at 0.5%. Broadbent’s predecessor, Andrew Sentance had consistently voted for a 50 basis point rate hike in recent months.

Analysts have suggested that the MPC’s continued failure to countenance a tightening of monetary policy suggests that there is potential for the UK’s asset purchase scheme to be re-ignited.

With Bernanke’s comments eliciting safe haven support for the Dollar and the Bank of England’s minutes weighing heavily on Sterling, the GBP USD rate traded down to 1.6018 overnight, its lowest level since the start of April. Further downside is possible for GBP USD today, particularly if European and North American equities follow the lead of Asian markets last night and trade lower.


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