TODAY'S BIGGEST PERCENTAGE MOVERS

• pips

  %

• CAD/JPY

  +34

  +0.41

• AUD/JPY

  +32

  +0.40

• AUD/JPY

  +36

  +0.36

THE STORIES IN THE CURRENCY MARKET

• USD: IS BERNANKE SERIOUS ABOUT QE3?

• EUR: GROWTH COMPACT

• GBP: RECESSION NOT AVERTED

• NZD: KEEPS RATES STEADY

• CAD: HOUSE PRICES DECLINE

• AUD: LEADING INDICATORS ON TAP

• JPY: DRIVEN LOWER BY MORE STIMULUS TALK

EXPECTATIONS FOR UPCOMING FED MEETINGS

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

USD: IS BERNANKE SERIOUS ABOUT QE3?

Fed Chairman Ben Bernanke preaches transparency but today’s FOMC announcements have once again created more confusion than clarity. While the central bank raised their forecasts for inflation and lowered their unemployment rate projections, Bernanke said the Fed is prepared to take more balance sheet actions to ensure that the recovery continues. These conflicting comments triggered erratic moves in the U.S. dollar as investors tried to understand where the central bank stands on monetary policy. Unfortunately when central bankers themselves fail to agree on the timing of the first rate hike, it is obvious that there is very little consensus. If we read between the lines, it is clear that Bernanke did not want investors to walk with the belief that the Fed has grown more optimistic and less dovish. Given the ongoing uncertainty in the financial markets, he didn’t want anyone to mistaken the central bank’s latest forecasts as a departure from easy monetary policy which is why he left the door open for another round of Quantitative Easing.

Regardless of the potential rise in inflation and the expected decline in unemployment, Fed Chairman Ben Bernanke is not ready to give up on QE3. During his press conference, the Fed Chairman said the central bank is prepared to take more balance sheet actions to ensure that the recovery continues. Yet his unambiguously dovish comments were at odds with changes to their unemployment and inflation forecasts. Earlier today, the Fed increased their inflation outlook, cut their unemployment forecast and downgraded their GDP forecasts for 2013 and 2014. This suggests that while they expect the level of unemployment to continue to decline, higher prices and lack of flexibility to further ease monetary policy could constrain consumer spending. Individual Fed Funds forecasts also showed 2 members of the FOMC shifting their forecast for the first rate hike from 2016 to 2014. All of this was lost on investors as they listened to Bernanke reiterate his commitment to keeping monetary policy ultra easy. Given the amount of division within the central bank and the change in the Fed forecasts, we wonder if Bernanke is expressing his own views or the consensus view. Either way, words are more powerful than action today and as a result, the dollar has given up all of its initial gains.

The most important takeaway from today’s FOMC announcement is that the Fed is still very worried about the outlook of the U.S. economy and the risks posed by Europe’s ongoing troubles. In the FOMC statement, they removed the line describing strains in the global financial markets as easing. Normally, a lower unemployment rate should lead to faster growth but labor participation has declined. The U.S. economy is expanding from a very low base and therefore improvements have not been significant enough to provide a cushion for the economy. Now that the pace of growth is slowing, the Fed finds itself forced to reconsider the need for more stimulus to keep the recovery going. Bernanke is also not particularly worried about inflation which he expects it to remain around the 2 percent target this year.

At the end of the day, there is still not enough consensus inside the Federal Reserve for any major decisions to be made. While Bernanke’s dovish comments drove the U.S. dollar lower, the reality is that QE3 is not an imminent risk. Bernanke is open to the idea but a more drastic pullback in growth or the asset markets would be needed for it to become a reality. If the economy moves forward at its current pace, QE3 may not be necessary.

EUR: GROWTH COMPACT

Comments from Bernanke drove the euro higher against the U.S. dollar but the momentum was not significant enough for the EUR/USD to firmly break out of its 2.5 week range. Although the pair managed to rise to a fresh high, it failed to close above the top of its prior range. There was no major Eurozone economic data on the calendar but European bond yields continued to decline with Spanish 10 year yields slipping to 5.75 percent. Italian yields also dropped, helping to narrow bond spreads across Europe. This is good news for the euro because as long as yields stay below 6 percent for both countries, the risk of an intensification of the European sovereign debt crisis would be limited. European Central Bank President Draghi delivered a speech to the European Parliament today and the most interesting thing he said was that a “growth compact” was needed. In the past, Draghi has called for a “fiscal compact” aimed at reducing budget deficits but now it appears that he is shifting his focus to growth. Concerns about the outlook for the region’s economy and the “very very high” level of uncertainty has made the ECB head realize that austerity is not the only thing that Europe needs right now. German Chancellor Merkel seems to agree that the fiscal pack signed last month is not the only solution to the European crisis. After Draghi’s comments, she said “we need growth in the form of sustainable initiatives, not simply economic stimulus programs that just increase government debt.” One way to achieve this would be through easier monetary policy but Mario Draghi made no indication of an increased willingness to do so today and instead urged Eurozone nations to take their own actions. German consumer prices are scheduled for release on Thursday along with Eurozone confidence indicators. Given the rise in the ZEW and IFO reports, we are not looking for any major deterioration.

GBP: RECESSION NOT AVERTED

The British pound strengthened against both the U.S. dollar and the euro today despite weaker economic data. The U.K. economy has experienced the dreaded double-dip recession, after shrinking by 0.2 percent in the first three months of 2012. A sharp fall in construction output was behind the surprise contraction, the Office for National Statistics said. The economy shrank by 0.3 percent in the fourth quarter of 2011 and expectations for the first quarter of 2012 were for an expansion of 0.1 percent. Prime Minister David Cameron said the figures were “very, very disappointing.” The fact that the U.K. is now technically back in recession should not detract from the underlying reality: U.K. economic growth has been chugging along for a year and is still unable to gain momentum. Many have questioned the dire numbers for the construction sector, which accounts for less than 7 percent of the economy, but has done much to drag the GDP figure into negative territory. Construction decreased by 3.0 percent. The sharp fall in output from the production sector is also in contradiction with recent business surveys. However, this preliminary figure confirms that fact that the U.K. was once again relying heavily on services and consumption by households. This suggests the recovery will continue to be frustratingly slow. Other data released today, including the index of services and industrial order expectations conflicts with the dismal GDP number. The index of services increased 0.2 percent in first quarter of 2012 from the fourth quarter of 2011 led by business services and finance and government services. The industrial order expectations release confirmed that the U.K. manufacturing sector is showing signs of bouncing back from the fragile conditions seen at the end of 2011. Orders and output volumes showed modest increases in the three months April, and momentum is expected to build further over the next three months. But the recession may be revised away. Revisions are normally in the order of plus or minus 0.2 percent.

NZD: KEEPS RATES STEADY

The rally in equities and improvement in risk appetite helped to drive the New Zealand, Australian and Canadian dollars higher. The Reserve Bank of New Zealand left interest rates unchanged at 2.5 percent which wasn’t much of a surprise. Inflation wasn’t a big issue but the strong currency could prompt the central bank to reevaluate its policy stance. Given that a strong NZD weighs on growth, this suggests that the central bank could back off its plans to tighten monetary policy. However their comment that the economy is showing signs of recovery and observations about stronger activity in the housing market implies that they are not overly pessimistic. Their concern is for global growth and market sentiment rather than domestic economic conditions. The NZD/USD initially declined on the RBNZ announcement but has since recovered. The fact that the RBNZ is not looking to raise rates is bearish for the NZD but losses should be limited. House prices in Canada declined 0.2 percent in February according to Teranet/National Bank. The housing market experienced a nice boom in recent years and according to the latest report, the bubble is beginning to deflate. The Teranet-National bank index measures the change in prices on resold homes and is narrow in its scope but nonetheless provides a read on how much the housing market has cooled. Other recent measures also show a slowing in the housing market and if this trend continues, the Bank of Canada could reconsider their plans to raise rates. No economic data was released from Australia overnight but leading indicators are scheduled for release this evening.

JPY: DRIVEN LOWER BY MORE STIMULUS TALK

The Japanese yen held steady or weakened against all the major currencies with the exception of the New Zealand dollar. No new economic data was released today, but there are a lot of releases on the docket tomorrow including household spending, preliminary industrial production and retail sales figures. The Japanese government appears to be desperate for more money because they reduced their holding of Japan Tobacco Inc., the world’s third largest tobacco company by sales volume to raise much needed funds for post-quake reconstruction. Increased reconstruction efforts will help provide a boost to Japan’s nearly flat economic growth. Japan’s central bank is set to increase stimulus measures as a rebound in the yen shows that the impact of a 10 trillion yen ($123 billion) expansion in asset purchases in February is fading. Expectations for increasing stimulus are unanimous with increases in stimulus ranging from 5 trillion yen to 10 trillion yen. One element that may undermine stimulus efforts is Governor Masaaki Shirakawa’s own comments, repeated in the United States last week, that monetary policy has only a limited role in ending deflation and supporting growth. Former Bank of Japan board member Atsushi Mizuno says investors are confused on where the central bank stands. However, the central bank’s struggle with an uncompetitive exchange rate will persist as long as Japan keeps saving more than it spends. For now, current Japan saving is perpetuated by its aging demographics. However, there will eventually be a tipping point where Japan’s savings excess – reflected in its ongoing current-account surplus – will run out. It will then need to attract foreign capital to finance government debts. The central bank has been trying to restore growth in the economy while heeding to political pressures and current market expectations. Policy makers at the central bank want to avoid as appearing to give into to short-term market expectations to retain credibility in its monetary policy initiatives. The stronger yen reduces export sales and profits and has been weighing on car and technology manufacturers. Floods in Thailand have also been hurting Japanese companies that expanded operations into that region.

EUR/USD: Currency in Play for Next 24 Hours

Our currency pair in play for the next 24 hours is EUR/USD. We are expecting the Eurozone’s business climate indicator, consumer, economic, industrial, and services confidence at 5:00 AM EST/ 10:00 GMT. Also the German CPI numbers are scheduled to come out tomorrow at 8:00 A.M. EST/ 12:00 GMT. For the United States we have the continuing claims and initial jobless claims released at 8:30 A.M. EST/ 12:30 GMT and the pending home sales released at 10:00 AM EST/ 14:00 GMT.

The EUR/USD has strengthened today, but it remains in a range according to our Double Bollinger bands. Our first level of support will be at 1.3064 because there were multiple opens and closes on April 5^th, April 6^th, and April 16^th but lacked the strength to close beyond them. Should our first support break then our second level of support will be at 1.3000 which is the lower second standard deviation Bollinger band and also a psychological level of significance. Our first resistance level will be at our upper first standard deviation Bollinger band at 1.3251. Should that level break then our second level of resistance will be at 1.3384 because it is the March 27^th’s intraday high.