Traders’ Conviction of Further Easing is Actually Easing
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Traders’ Conviction of Further Easing is Actually Easing

The rhetoric is ramping up as we get closer to the Friday speech by FED Chairman Bernanke in Jackson Hole, Wyoming.  More and more officials are talking from both sides of the ocean and it looks as though traders’ conviction of further easing is actually easing.  After initially looking very bid following the announcement that ECB President Draghi will not attend the Jackson Hole central bankers’ meeting because of his “heavy workload” the EUR is wavering.  

Traders expectations that this heavy workload was a signal that the ECB may have some important announcement next week coupled with the expectations of some hints of QE3 from Bernanke on Friday moved the EUR higher. This move higher really hasn’t paned out and one must wonder if traders are once again getting the feeling that nothing is going to happen.

Guest post by  Matthew Lifson, Foreign Exchange Trader,  Market Analyst of  Cambridge Mercantile Group.

The EUR had a very quiet overnight range during Asian and early European trading moving in a 40 point range.  After testing lows around 1.2530, the EUR moved higher after the release of Italian retail sales showed an improvement in June rising 0.4% month on month after a 0.1% rise the previous month.  Over the last year Italy’s retail sales had contracted 0.5%.  This news release pushed the EUR from its session lows to its highs.

It is easy to see that the market is reacting to any news, both positive and negative in a attempt to get ahead of the next major move.  Most traders are waiting for the release of the FED Beige Book later this afternoon, expecting that their will be clues there on the Bernanke speech Friday.  While the Beige Book will show how the US economy is acting, it still may not give any clues to the Bernanke speech.  Some analysts believe there is a bit of overdone expectation regarding stimulus and the concern remains that there could be some disappointment from the speech on Friday and the ECB meeting the following week.  In fact, the Bloomberg US FInancial Conditions Index moved above zero on July 27, and this signals that market risk is receding.  This number was below negative 1 last year when Chairman Bernanke spot at Jackson Hole.  The is a growing opinion that if the economy is calming down, the FED may not be ready to take action, and while some sort of easing is probable in the coming months, the timing may not be right to do it now.

While earlier speculation on the Bernanke speech had focused on hints of easing, now economists are thinking he may just discuss the US economic outlook, how actions to date have worked and what future policy alternatives might be.  Again, if there is no easing at the September 12-13 policy meeting by the FED, odds are nothing will happen until after the US Presidential election.

Expect the EUR to remain within the trading range of the last few days.  We could see a retest of the 1.2590 level tested earlier this week, but unless there is a major meltdown in the economy that comes out of the Beige Book release, it isn’t likely we see a major move today.

Asian and early European equity markets are mostly lower as are the DOW Futures indicating a lower opening to the US equity market.

Only two days to Jackson Hole.  Hang in there.

Matthew Lifson

Matthew Lifson

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.