On Monday, Federal Reserve Chairman Ben Bernanke, delivered the Monetary Policy Report to Congress. The highlight of the report was the Chariman’s characterization of the economic outlook as “unusually uncertain.” While Bernanke still anticipates growth in the economy, the rate of growth is now expected to be slower than previously thought.

The Fed is forecasting GDP growth of 3 to 3.5 percent in 2010, and 3.5 to 4.5 percent in 2011 and 2012. The unemployment rate is expected to decline to between 7 and 7.5 percent by the end of 2012. In his testimony, Bernanke repeated the Fed’s pledge to maintain “exceptionally low levels of the federal funds rate for an extended period of time,” however, no new measures were offered to stimulate the economy. Fed Funds futures indicate no rate hikes from the central bank until August of 2011.

The minutes of the July Bank of England policy meeting released yesterday showed that the monetary policy committee voted 7-1 again last month to leave interest rates on hold at 0.50%, the historically low level that has prevailed for well over a year now. It also voted to leave the stock of asset purchases (or quantitative easing) unchanged at £200 billion. Andrew Sentance again voted for a rate hike, reflecting his view that economic conditions had improved over the past twelve months and inflation risks had shifted to the upside.

However, the minutes show that Sentance appears to have little support from his MPC colleagues, with the committee actually considering arguments in favour of a modest easing in the stance of monetary policy. The softening in the medium term outlook for GDP growth that has emerged over recent months would put further downward pressure on inflation over the central bank’s forecast horizon. A further modest monetary stimulus would act to offset this softening in demand and make it more likely that the inflation target would be met in the medium term.

With the results of stress tests on 91 European banks looming, financial institutions have been coming up with their own scenarios of what to expect. How financial markets react to the results may well depend on the expectations currently being reached by analysts – what is evident is that the release due to commence tomorrow morning will be significant and both buyers and sellers of the Euro are advised to work “Stop” orders to minimise any potential downside movement. Either way with the release of UK GDP and with the Bank stress tests markets will be particularly volatile.

If you would like to discuss your requirement before tomorrow then please contact me on my direct line +44 1736 335264 or email me direct at tom.trevorrow@torfx.com

Tom Trevorrow
Senior Trader