Dovish Bernanke drives pound and gold higher

The pound strengthened and gold rose to a two-week high after Ben Bernanke said the U.S. economy needed QE to continue for the "foreseeable future." The Fed chairman's message that interest rates are going to remain low was similar to that from Mark Carney, the Bank of England Governor, and Mario Draghi, the ECB President last week.

12:10PM BST 11 Jul 2013
The Telegraph

Sterling, which two days ago hits a three-year low of $1.4814, gained nearly 1pc to $1.5134 against the dollar in late morning trading on Thursday. Gold rose 2pc to $1,285.

“Bernanke’s speech was the key driver for an aggressive dollar sell off overnight," said Lee McDarby, of Investec Corporate Treasury.

"The immediate reaction was for investors to run for the exit door of their long dollar positions."

Mr Bernanke's comments followed a relatively neutral FOMC minutes in which policymakers expressed concerns that inflation was slowing, which would increase pressure to continue QE3.

The Fed chairman's message that interest rates are going to remain low was similar to that from Mark Carney, the Bank of England Governor, and Mario Draghi, the ECB President, last week, which buoyed equity markets.

Mr McDarby said: "Market reaction in the next 24 hours will be key because if this rally runs out of steam and the market trades back below $1.5000, it tells us that investors still buy into the story of the US changing policy tack and have enough faith this will arrive in September."

He said that if the pound consolidated at current levels against the dollar it could signal that the market was "tiring of the mixed messages" from the Fed and will wait for firm guidance before "going long" on the dollar.

The dollar has strengthened against a basket of currencies since Mr Bernanke said after last month's Fed meeting that the central bank may start to taper its $85bn-a-month bond buying programme this year.

according to the minutes of that meeting, published on Wednesday, around half of Fed policymakers wanted to bring its massive fiscal stimulus package to a relatively rapid halt this year, instead of phasing it out slowly by the middle of 2014.

However, the minutes also made clear that Fed members are waiting for further evidence of a sustainable improvement in America’s employment levels before they take action.

Official data show that although the jobs situation has steadily increased since the last Fed meeting, the improvement has been sufficiently muted to dampen fears that it will apply the brakes abruptly.

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