Without an immediate Recession Threat, QE3 Hints are Unlikely

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The recent evidence from the Beige Book shows that economic activity is gradually picking up. This lowers the chances for any hints about QE3 from Bernanke, says David Song of DailyFX.

In the interview below, Song discusses the situation in the US, the chances for a disappointment from the ECB, a potential Grexit and more topics.

David Song studied macroeconomic policies under a visiting scholar at the Federal Reserve Bank of St. Louis while attending the Zicklin School of Business at Baruch College, and graduated with a Bachelor of Business Administration degree majoring in finance. During his undergraduate program, David acquired a strong understanding of technical analysis from a former-president of the Market Technicians Association, and incorporates both fundamentals and technicals in his analysis. After starting at DailyFX, David authors the daily briefings for the U.S. Open as well as the Trading the News report. David Song

  • The recent FOMC meeting minutes fueled the QE3 camp. Are expectations too high once again? Will a lack of hints by Bernanke at Jackson Hole boost the dollar?

Despite the dovish tone struck by the FOMC Minutes, the Fed’s Beige Book dampened speculation for another large-scale asset purchase program as the central bank saw economic activity ‘gradually’ picking up in July and August, with six of the twelve district banks seeing “modest pace” growth. Without an immediate threat for a double-dip recession, there’s certainly greater scope of seeing Fed Chairman Ben Bernanke refrain from hinting at QE3 as the world’s largest economy gets on a more sustainable path. In turn, the recent weakness in the U.S. dollar should be short-lived and the greenback looks poised to track higher going into the following as the central bank head curbs expectations for additional monetary support at the September 13 meeting.

  • The German constitutional court is set to rule on the ESM bailout fund only after the upcoming ECB meeting. Can the upcoming ECB meeting turn into a non-event? What can we expect from this meeting?

There’s growing speculation that the ECB will layout its asset purchase program in greater detail at the September 6 meeting, but President Mario Draghi may merely reiterate the statement from the previous month as there appears to be a growing rift within the Governing Council. As Bundesbank President Jens Weidmann and National Bank of Belgium Governor Luc Coene argue against expanding the ECB’s balance sheet further, the press conference with Mr. Draghi may fail to generate a bullish outlook for the euro should the meeting turn into a non-event. Going forward, we’re interested to see if the Governing Council will push through the non-standard measure without a unanimous vote, but putting the central bank’s independence on the line may ultimately dampen the long-term outlook for the single currency as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

  • Angela Merkel recently said that the Greek crisis is at a decisive phase. Is Europe genuinely prepared for a Grexit at the end of the autumn? Are the shock absorbers in place for a “manageable” exit?

Beyond the immediate repercussions of a Grexit, the precedence that it sets could trigger a domino effect as European policy makers struggle to restore investor confidence. Without an exit mechanism in place, there’s a great likelihood of seeing a financial shock across the world market and other periphery countries may follow suit as the EU fails to meet on common ground. Even if Greece leaves the monetary union, it fails to address the threat for contagion and the euro remains poised to depreciate further as the debt crisis pushes the economy into a deeper recession.

  • Britain has released mixed economic signs lately. Can we expect action from the BOE in the upcoming meeting? Or are we set for a long period of no policy changes?

With the Funding for Lending scheme under way, the Bank of England is widely expected to maintain its current policy at the September 6 meeting and the central bank may stick to the sidelines throughout the remainder of the year as the new program is expected to boost private sector activity. At the same time, the recent pickup in price growth may dampen the BoE’s forecast of undershooting the 2% target for inflation and the central bank may scale back its dovish tone for monetary policy as the recovery slowly picks up. In turn, we may see the Monetary Policy Committee slowly move away from its easing cycle and the shift in the policy outlook instills a bullish outlook for the British Pound as Governor Mervyn King talks down expectations for a rate cut.

  • There is a debate in Australia regarding the end of the mining boom after the cancellation of some projects. Is the Australian economy and the A$ heading down under?

Beyond the uneven recovery in Australia, the $1T economy may face additional headwinds over the near to medium-term as China – the region’s largest trading partner – faces a growing risk for a ‘hard landing.’ As China moves away from its export market to a more consumer-based economy, we’ve seen Reserve Bank of Australia Governor Glenn Stevens warn that the recourse boom will taper off in the next two years and we anticipate to see the central bank carry out its easing cycle throughout the second-half of 2012 in an effort to shore up the $1T economy. As a result, we should see the Australian dollar maintain the downward trend carried over from the previous year and we will preserve our bearish forecast for the AUDUSD as the fundamental outlook for the region deteriorates.

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Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

2 Comments

  1. I knew QE was not going to happen this quarter. I think it may come back a few Q’s down the line though depending on how much aftershock we get from what happens in Europe

  2. Pingback: EUR/USD Forecast September 3-7 2012 | Forex Crunch