Will Fed Chairman Bernanke Cut the US Dollar Rally Short on Wednesday?

Today, Federal Reserve Chairman Ben Bernanke will testify on the economic outlook before the Joint Economic Committee of Congress. Bernanke’s comments tend to spark volatility not only in the forex markets, but also in the equity and fixed income markets. Why? Risk trends. At this juncture, the biggest market-mover for global assets tends to be related to the Federal Reserve (interest rates, inflation, the economy) and the US financial sector – and all of these points will likely be touched upon by Bernanke. However, traders will react to whatever topic serves as his main focus. If Bernanke cites inflation as his predominant concern and indicates some worries about moral hazard coming into play, fed fund futures will likely shift quickly to cut back speculation of a 50bp cut on April 30 and instead move to only price in a 25bp reduction to 2.00 percent. On the other hand, Bernanke could keep instability in the financial markets, tight credit conditions, and major downside risks to economic growth as his primary focus. This would not only sound extremely bearish, but it would also lead fed fund futures to quickly price in more aggressive rate cuts in the near term.