Ben speaks tonight

The euro is gaining further strength despite renewed debt unrest. The dollar weakens ahead of Bernan

(27.04.2011) The euro is gaining further strength despite renewed debt unrest. The dollar weakens ahead of Bernanke's historical press conference tonight. Today's British GDP release could make its mark on pound sterling today.

By Kjersti Haugland, Analyst at DNB Markets

The euro stays strong despite Greek government bond yields reaching new record heights, after a Eurostat release showed that Greece failed to reach its budget deficit target last year. Due to a larger GDP fall (and hence lower tax income) than expected, the budget deficit came to 10.5% of GDP in 2010. The markets are convinced that a default is inevitable. Lars Feld, one of Angela Merkel's most important advisors on economics, said yesterday that Greece should restructure its debt sooner rather than later. Not only the Greek, but also the Irish and the Portuguese budget deficit for 2010 was revised upwards by Eurostat, to 32% (!) and 9.1% respectively.

Finance minister Geithner repeated yesterday that the US has a national interest in a strong dollar. Nevertheless, the dollar kept losing terrain on a broad scale. The EURUSD is traded at 1.4670 in the morning hours. A large part of the explanation is expectations of a continued ultra-expansionary monetary policy in the US. Tonight's press release from Fed is expected to signal that the key policy rate will remain at todays near-zero level for an extended period, and that the USD 600 bn asset purchase programme will be completed as planned in June. The FOMC meeting started yesterday, and the press release will be released 16:30 GMT.

Fed has traditionally been known as a non-transparent central bank. The press conference tonight hence constitutes an important milestone in the central bank's history. For the first time the governor will answer questions about the current monetary policy decision at a press conference. These are to be held in the wake of each of the four annual two-day FOMC meetings: in January, April, June and November. Market's will follow Bernanke's choice of wording carefully, and seek to uncover signs of a more hawkish touch in Bernanke's tone. 

Another innovation for today's meeting is that Fed's macro estimates are revealed at the same time as the press conference. Previously these have been released at the same time as the FOMC minutes about three weeks after the meetings. In January, the last time FOMC published their prognoses, they expected GDP growth to be between 3.4% and 3.9% in 2011 and the unemployment rate to edge down to 8.8% in Q4. Growth estimates will most likely be revised down, as has been the trend for consensus lately. According to Reuters, market participants expect GDP growth to come down to 1.9% q/q annual rate in Q1, down from 3.1% in Q4 2010, when released on Thursday. If this turns out to be correct, the Fed would need brisk growth in the remains of the year to reach its January estimate. However: The unemployment rate came down to 8.8% already in March, and we should expect the Fed to signal a brighter view of the labour market.

The market will monitor the release of UK Q1 GDP closely this morning. After a surprising 0.5% q/q decline in Q4, consensus according to Reuters is for a rise of 0.5% in Q1. In the same way as ECB's hike in April (and expectations of more to come) has contributed to a marked strengthening of the euro lately, the development in pound sterling has been marked by shifting expectations regarding Bank of England's hiking plans. Inflation far above target for over a year has pointed towards BoE following ECB's lead already this summer. Tough austerity measures and disappointing macro data lately have made the prospects of UK hikes less certain. Even though GDP numbers to some extent are "old news" compared to more timely monthly releases, a deviation from consensus outcome will surely lead to movements in pound sterling.

Unlike the EURNOK, the EURSEK is traded at higher levels this morning, compared to yesterday morning. The reason is probably that the rapid improvement in the Swedish labour market stalled in March, when the unemployment rate rose to 8.1%, instead of remaining at 7.9% as was expected.