In New York, the euro pared earlier gains and traded lower against the U.S. dollar after Federal Reserve Chairman, Ben Bernanke’s testimony weakened certainty that the U.S. economy will receive a third round of quantitative easing (QE).
The U.S. dollar experienced significant weakness after the announcement of QE 1 in November 2008 and QE2 in August 2010. The first round of QE increased the money supply to initially purchase $500 billion in mortgage backed securities and $100 billion in Government Sponsored Enterprises to support firms like Freddie Mac and Fannie Mae. In March of 2009, the Federal Reserve committed to buying an additional $750 billion of mortgage-backed securities, bringing the first round total to $1.25 trillion. QE2 purchased $600 billion in U.S. Treasury securities.
When talking about a potential default of U.S. debt, Mr. Bernanke said, “It would be a calamitous outcome.” He expressed that an increase of the debt limit is required in order to avoid future problems and to bring credibility and stability to the creditworthiness of U.S. debt. Yesterday, the forex market reacted quickly in pricing in another round of QE and sold U.S. dollars. Today’s testimony however suggests that the Fed will not act immediately and it is not certain that QE3 will occur. The Fed will monitor and only act if further weakness comes to the housing market, consumer spending, or jobs market.
The euro is trading at $1.4134 after reaching significant resistance at $1.4250 late Wednesday. The monthly chart above shows a breakdown below our triangle (shown in red). The bearish stance has resumed and could gain further momentum and target $1.3750. A daily close above $1.4300 could invalidate immediate downside and target further resistance at $1.4700.