Monetary policy is at the forefront for financial markets as all eyes turn to minutes from July’s BOE policy meeting and Congressional testimony from Ben Bernanke.

Talking Points

• US Dollar to Fall if Bernanke Testimony Cools QE “Taper” Speculation

• British Pound Looks to BOE Minutes to Size Up Carney’s First Outing

The US Dollar recovered against its major counterparts in overnight, adding as much as 0.3 percent on average, as markets digested the largest decline in four days recorded over the prior 24 hours. All eyes are now on Federal Reserve Chairman Ben Bernanke two days of semi-annual testimony to the US Congress. Traders are looking to the central bank chief’s comments to inform expectations for the timing and size of a reduction of the Fed’s QE effort.

Bernanke has been busy highlighting the difference between “tightening” monetary policy and “tapering” asset purchases recently after markets ran with pricing in a hawkish shift in the posture of the rate-setting FOMC committee following the June meeting. That move produced a sharp jump in US bond yields and sent risky assets tumbling. The greenback is likely to come under renewed pressure if the rhetoric emerging out of today’s testimony continues to stress a need for accommodation and the data dependence of the decision to taper QE purchases.

The release of minutes from July’s Bank of England policy meeting, the first one with Governor Mark Carney at the helm, is in focus on the European economic calendar. Investors will be keen to see how the new leader of the central bank voted on the matter of expanding QE and what logic went into the decision to issue an accompanying statement (a move unusual for the BOE at times when it doesn’t change the policy mix).

All else being equal, the British Pound is likely to rise if Carney voted against more QE, and vice versa. Hints of change in the central bank’s strategy in delivering policy support – such as the introduction of Fed-style forward guidance on how long rates are likely to remain low – will probably weigh on Sterling however. Separately, economists’ forecasts call for an 8,000 decline in UK Jobless Claims in June, putting total outstanding applications for benefits at the lowest since March 2009.

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