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Daily News from Senior FX Analyst – Samuel Allen

Federal Reserve chairman Ben Bernanke surprised the market in his Semi-annual Monetary Policy Report to Congress yesterday, Bernanke’s bullish stance on the American economy turned more bearish when he stated that the economic outlook was “unusually uncertain.” The market responded by an initial rush back to risk aversion, the cable rate dropped back to its support level almost 2 points lower at 1.5150 but has been bought back up again so far today. He also re-stated his policy to keep interest rates flat for a long time to come. Fed Funds futures indicate no rate hikes from the central bank until August of 2011.

The ECB’s own brand of quantitative easing has slowed down for the third week in a row dropping from €4 billion 3 weeks ago down to €302 million this week. The markets have responded positively to this news and the EUR/USD rate has been bought back up to its 1.29 EUR/USD resistance level with further gains expected up until tomorrow afternoons stress test results which will be announced at 4pm GMT. The GBP/EUR rate only showed a moderate drop due to stronger than expected retail sales from the UK this morning which showed retail sales excluding auto fuel rise to 1% in June versus an expected 0.6% growth.

In the minutes to the July 6st meeting, the Royal Bank of Australia stated that the global economy was expanding in line with expectations in recent months, which sent the GBP/AUD rate down almost 1% before running out of steam at the 1.7110 support level. They also noted that the headline inflation was expected to rise due to “the effects of some tax increases, with the year-ended increase in the CPI rising above 3 percent.” In spite of this hawkish stance on interest rates the overnight index swaps indicate that there will be no rate hikes from the RBA over the next year. The Australian economy still shows more signs of health than the British economy due to its proximity to booming Asian markets.

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