Dollar drops again after Fed�s Bernanke testimony

Federal Reserve Chairman Ben Bernanke said inflation pressures were starting to ease, boosting chances of a US interest rate cut later this year. He told the Senate Banking Committee that inflation was starting to diminish, even though it will take time to confirm the downtrend. Bernanke�s remarks surprised investors who expected him to confirm recent comments from other Fed officials about the upside risks to the inflation outlook. Bernanke was delivering the first part of his semi-annual testimony before Congress, and he will address the House Financial Services Committee today. Japanese data showed surprising strong 4Q growth, which boosted expectations for a Bank of Japan interest rate rise next week. Even if the BoJ lift up rates to a decade high 0.5% from 0.25%; many investors believe the Japanese currency would still be weak compare to other major currencies.

News and Events:
The Dollar dropped to six-week lows against the Euro on Wednesday after Federal Reserve Chairman Ben Bernanke said inflation pressures were starting to ease, boosting chances of a US interest rate cut later this year. He told the Senate Banking Committee that inflation was starting to diminish, even though it will take time to confirm the downtrend. Bernanke�s remarks surprised investors who expected him to confirm recent comments from other Fed officials about the upside risks to the inflation outlook. US interest rate futures rose on Bernanke�s remarks, increasing the implied chance the Central Bank will cut its benchmark interest rate from the actual 5.25% later this year. Bernanke was delivering the first part of his semi-annual testimony before Congress, and he will address the House Financial Services Committee today. Eurusd was up 0.82% at 1.3138, as some technical analysts recommended buying Euro against Dollar in anticipation of a potential test of the record high in the Euro above 1.3666. UsdJpy was down -0.79% to 120.31. UsdYen dropped to a one-month low as Japanese data showed surprising strong 4Q growth, which boosted expectations for a Bank of Japan interest rate rise next week. Japan�s economy expanded at an annualized rate of 4.8% in the 4Q, beating market expectations for growth of 3.8% (recovery in personal consumption). Even if the BoJ lift up rates to a decade high 0.5% from 0.25%; many investors believe the Japanese currency would still be weak compare to other major currencies. Yen climbed across the board; but traders said the reaction was exaggerated because the market had been long Dollar and Euro ahead of the GDP figures as some players wrongly expected a softer data. The Yen sharp jump triggered liquidation of many long UsdJpy and EurJpy positions.

Today’s Key Issues:

GB 9:30 GMT: January Retail Sales expected 0.2% vs 1.1% (MoM) and 5.4% vs 3.7% (YoY)

CHF 10:00 GMT: February ZEW survey previously -10.8

Euro 12:00 GMT: ECB�s Trichet speaks in Amsterdam

US 13:30 GMT: February 10th Initial Jobless Claims expected 305k to 325k vs 311k, February Import Price Index expected -1% vs 1.1% (MoM) and 0% vs 2.5% (YoY), February Empire manufacturing Index expected 10.4 vs 9.1.

US 14:00 GMT: Fed�s Poole speaks to Charter Financial Analysts in Nebraska

US 14:50 GMT: January Industrial Production expected 0% vs 0.4%, Capacity Utilization expected 81.7% vs 81.8%,

US 15:00 GMT: Fed�s Bernanke testifies before House Panel on Monetary Policy

EUR 17:00 GMT: ECB�s Quaden presents Annual Report

US 17:00 GMT: February Philadelphia Fed Index expected 0 to 8.3 vs 8.3

US 18:00 GMT: February NAHB Housing Market Index expected 35 unchanged.

The Risk Today:

EurUsd broke up 1.3075 former resistance and is now heading 1.3130 (61.8% retracement of the 1.3298-1.2865 decline) and 1.3176 (61.8% retracement of the 1.3268 to 1.2865 decline). Initial support lies at 1.3050 minor support, but weakness beneath 1.2900 trend support would be necessary to undermine the developing bullish theme.

GbpUsd bounced sharply from Tuesday’s 1.9403 low and recovered beyond 1.9604 former resistance; which has relieved the broader bear threat and open the door for further advance to 1.9750 resistance (61.8% retracement of the 1.9917-1.9482 decline). A break there is required to confirm the return of the bull trend.

UsdJpy sell off continues and confirmed the near-term reversal below 121. Getting closer to 119.90 key support is suggesting that scope exists for a deeper pullback. 119.23 (38.2% retracement of the 114.43-122.20 rally) marks the next downside objective.

UsdChf further weakness below the 1.2376 might highlight a potential trend reversal. Clear follow through would confirm a head and shoulders reversal pattern and target 1.2309 (38.2% retracement of 1.1881-1.2574 advance). Next support holds 1.2260 level. Initial resistance is at 1.2480.

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