Currency Watch: Markets react to Bernanke’s words

It’s been a strange week. The ECB printed over €500 billion and loaned it to banks and the markets did very little in the way of a response, while a few short words from the chairman of the Federal Reserve then prompted large shifts in the foreign exchange space.

The ECB’s quantitative easing plan is ambitious, to say the least. A liquidity crunch such as the one the world went through in the post-Lehman period has so far been averted, but the question remains, as it does with all QE plans it seems, as to whether this strategy will benefit the real economy.

People from businesses both large and small will know that obtaining credit from the banking sector is still very difficult at the moment. It is more difficult in Europe with demand and supply both being affected as a result.

As with all the QE programmes that we have seen from the US to Europe they are not long-term fixes, but merely a painkiller, an anaesthetic against the labour pains of fiscal contraction and therefore more must be done by the people in power in Europe.

The market reaction was muted after the announcement with traders here and elsewhere unsure as to how to play it.

Markets were very messy as they digested the data with lifts seen in gold, oil, silver and peripheral government bonds in the minutes after publication. The euro remained resilient, however, until Ben Bernanke began his Humphrey-Hawkins testimony on Capitol Hill.

The chairman’s overall tone was downbeat compared to previous speeches – and certainly when held up against recent positive data from the US.

The lack of any language surrounding further monetary stimulus for the US economy was the main cause of a general “risk-off” shift in asset classes, with equities falling and the US dollar having its best day in recent weeks.

As a result GBP/EUR has managed to climb back into the mid-1.19s following its little trip below 1.18 for the past week; I know a lot of people will be looking for further gains, but we think they will remain hard-fought and hoping for price actions in the 1.22s is dangerous.

Jeremy Cook is chief economist at World First foreign exchange