Fed Chairman Ben Bernanke’s testimony on the economy to the US Congress, has so far been the epitome of neutral. In typical Bernanke style he has oozed caution, unwilling to side with the doves or the hawks, leaving the markets in a bit of a fluster.


Highlights:


· He said that policy will remain accommodative “as long as needed”.

· Premature tightening “increases the risk of slowing or ending the recovery”.


· He said he sees inflation at or below the Fed’s 2% goal over the next few years.


· QE3 is dependent on the data, the Fed will respond to that data.


· If data picks up then the Fed could halt asset purchases in the next few months.



Market reaction:


Although Bernanke’s testimony was fairly neutral, the market seems to have focused on a potential end to QE3 this summer if warranted by the economic data. What the market seems to be forgetting, is that the Fed will have seen last week’s run of weaker economic data, so the end of QE3 is not necessarily round the corner.

Overall, Bernanke doesn’t seem to have been “dovish enough” for stock investors and the SPX 500 has backed off from record highs. The USD is higher, and the 10-year Treasury yield is at the top of its recent range, just below 2%.


Price action during the Bernanke testimony suggests to us that markets are addicted to liquidity, and if Bernanke isn’t going to feed the beast then the SPX 500 gets sold and the USD and Treasury yields rise. What is even more illogical about today’s price action, is that Bernanke resisted all attempts to define a timetable for QE exit, so why the sell off?


When the dust settles, we tend to think that any dip in US stock markets could be shallow, however, the break above 103.30 (Friday’s high) in USDJPY suggests that the USD rally could have been given a leg higher by Bernanke. Likewise, EURUSD could come under further pressure, a daily close below 1.2850 is a bearish development in the short term that opens the way to 1.28 and then 1.2770.


In the S&P 500 key support levels include: 1,660 and then 1,625.


In USDJPY resistance levels of note include 103.90 then 104.25. This cross is looking overbought on a short term basis, so watch out for a pullback. Support lies at 103.10 then 102.60 – convergence of 50 and 100-hour moving averages.