Sharp Euro declines on the Italian Election results weren’t enough to save the US Dollar, as the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) fell on a pronounced Japanese Yen reversal.
Going into tomorrow’s trading, top event risk for the Dollar Index will be testimony from Fed Chairman Bernanke in his annual report to the US Senate Banking Committee. Much of the Fed’s policy has been covered in the FOMC Minutes released last week, but it is always interesting to listen to questions asked and answered during the so-called Humphrey Hawkins testimony.
It is almost certain that Senators will ask issues concerning about quantitative easing policy, such as risks to financial stability, market functioning and of losses on exit strategies. This will help investors gauge timing on the Fed’s monetary stimulus in the near term. Any hints of an accelerated end to Quantitative Easing could force a noteworthy US Dollar bounce.
Another driver to the Dollar Index is Japan’s January Retail Trade report due later in the day. Economists surveyed by Bloomberg News predict retail sales rose 0.9 percent in January—a result that would represent the best growth since August and improved fundamental outlook for consumption. The Japanese Yen has weakened as aggressive rhetoric and the threat of highly inflationary monetary policy have led most to sell the JPY. Yet improved fundamental outlook for the domestic economy could cloud calls for a hard change in Bank of Japan policy and put further pressure on JPY currency pairs.
The EURUSD may extend losses on political risks on the results of Italian elections. The most updated poll showed results for 97 percent of all votes and had the Centre-left on 29.67 percent and Centre-right on 29.55 percent. Political gridlock seems likely and may hinder further progress on budget-balancing deals.
Reactions in Italian bond markets summarized the day’s developments quite well: the 10-year Government Bond initially surged as it seemed the pro-Euro Centre-left would take power. Yet later poll results warned of deadlock, completely erased all gains, and forced sympathetic declines in even the US S&P 500 and broader risky asset classes.
A close below key support underlines risks that the Euro may continue to decline against the safe-haven US Dollar.
| Date | Time | Currency | Event | Importance | Forecast | Previous |
| Fri Feb 26 | 15:00 |  | USD Fed’s Bernanke Testifies at Senate Banking Committee | High | ||
| 23:50 |  | JPY Retail Trade (MoM) (JAN) | Medium | 0.9% | 0.0% | |
US Dollar May Rally Further on Italian Election Results, Bernanke
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