For the past several weeks, speculation has risen over the possibility that the Federal Reserve may begin to wind down the current Quantitative Easing policy. Federal Reserve Chairman, Ben Bernanke, testified on Wednesday commenting on the recent changes and improvements in the US economy. Bernanke surprised the markets, stating that ending the program prematurely would endanger a recovery hampered by high unemployment and government spending cuts. Moreover, the Fed Chairman hinted that the first reduction in QE purchases could occur as early as September. Bernanke’s comments caused some turbulence in the FX market towards the end of the week.
The Euro started the week on a positive note, opening at 1.2840, following Federal Reserve Bank of St. Louis President James Bullard statement, saying, “Policy makers should keep buying bonds as the best available option to boost growth”. The single currency then rose to 1.2934 against its American counterpart. The Euro continued its climb against the US Dollar, as Federal Reserve Chairman Bernanke told Congress that tightening policy too soon would endanger the recovery. The market then reversed its trend, as further comments from Bernanke pushed the Dollar higher against all major currencies, as he said the central bank might taper monthly bond purchases at its next few meetings, giving more room the US economy to grow. The Euro dropped significantly following Bernanke’s comments to a low of 1.2821. The Euro then regained its losses and hiked all the way back to 1.2993 after positive German confidence data. The single currency closed the week at 1.2932. Cable opened the week at 1.5170, only to rise following a report that showed that home prices rose to a record, adding signs that the economy is improving, pushing the Pound to a high of 1.5281. The Sterling Pound then collapsed against the US Dollar, after a report showed that UK inflation slowed more than forecasted. The Pound touched a low of 1.5014 on Thursday, and closed the week at 1.5127. The Japanese Yen ended its 2-week losing streak against the Dollar. The JPY opened the week at 103.20, weakening against a stronger US Dollar throughout the week, to touch a low of 103.74 on Wednesday. The Japanese Yen then strengthened dramatically, triggering orders in the market following Bernanke’s comments. Adding pressure on the JPY, the Nikkei experienced a 7 percent drop on Thursday, following bad economic data from China. The Yen gained 307 basis points against the greenback, touching a high of 100.67, breaking major support levels. The Japanese Yen closed the week at 101.31.
New / Existing Home Sales
Sales of previously owned American houses climbed last month to the highest level in more than 3-years, even in the midst of strict borrowing rules. Purchases of existing houses increased to 4.97 million homes, the highest level since November 2009. The figure came less than the forecasted 4.99 million, but still managed to beat the previous months’ figure of 4.92 million. The gain in the housing sector is attributed to near record low borrowing costs.
The low borrowing costs and job gains attracted more buyers into the market. New home sales in the US have also climbed in April to the second highest level in almost five years. New home purchases rose 2.3 percent to 454,000 homes, beating expectation by 29,000 homes, and over performing March’s figure of 417,000.
Unemployment Claims
Fewer Americans than forecasted filed for first-time claims for unemployment last week, indicating that companies are keeping their employees and the labor market is sustaining recent gains. The number of Americans filing applications for unemployment benefits unexpectedly fell by 23,000 to 340,000. The figure came lower than the expected 345,000. As dismissals slow, this could boost a pick-up in hiring while the economy battles to overcome the federal budget cuts that are expected to curb the expansion.
Bernanke Testifies
The Federal Reserve Chairman, Ben Bernanke, defended the central bank’s record stimulus program, stating that ending the program prematurely would endanger a recovery hampered by high unemployment and government spending cuts. Chairman Bernanke said, “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further”. Bernanke mentioned the economic costs of the elevated employment rate, which stands at 7.5%, even after four years following the deepest recession since the Great Depression, adding that the Federal Reserve easing program is providing “significant benefits to the American economy”.
Europe
German Manufacturing
German manufacturing index rose more than forecasted this month, signaling hope that the Eurozone is pulling out from its record long recession. The Manufacturing Purchasing Managers’ Index rose to 49.0 in May, exceeding estimates of 48.6. The figure rose from April’s number of 48.1. A reading above 50 indicates growth, and below 50, contraction.
German Ifo Business Climate
German Business confidence increased for the first time in three months, adding signs that Europe’s largest economy is gaining traction and gathering pace. The Ifo Institute’s business climate index climbed to 105.7 this month, the first gain since February, from 104.4 in April, equivalent to the forecast of May. Europe’s largest economy grew 0.1% in the first quarter, after contracting 0.7 percent in the last quarter of 2012, as an abnormally long winter damped construction and investments.
United Kingdom
No Expansion for Stimulus
The Bank of England members voted to keep the asset purchase program at GBP 375 billion this month. The BoE Governor, Mervyn King, was defeated for a fourth month in his bid to expand stimulus as the majority of officials cautioned against the danger of fueling inflation expectations. According to the minutes, the majority said that “there was tentative evidence that measures of medium-term inflation expectations were becoming more sensitive to short-term news in inflation” and that “financial markets were not expecting further asset purchases at this meeting and might, at the margin, reassess the committee’s tolerance of elevated inflation should additional stimulus be injected”. The nine members of the MPC voted to keep the benchmark interest rate at a record low of 0.5percent.
The Peninsula
