Ben Bernanke head of the US Federal Reserve predictably kept policy on hold whilst reducing forecasts for unemployment and raising expectations for higher near term inflation. The US economy is still expected to grow at a ‘moderate’ pace in coming quarters, with the bulk of Fed members predicting the first tightening in 2014 or beyond.

The one concession to markets was the fact that the Fed is ready to do further in terms of policy development if required.

This helped to boost risk assets overnight leaving the Greenback on the back foot.

Headline releases are thin on the ground today leaving markets to consolidate gains in a relatively ‘risk on’ environment.

Sterling came plummeting down from its summit following yesterday’s news that the UK economy entered a technical recession after GDP unexpectedly contracted by 0.2% in the first quarter of the year.

Nevertheless, the fall was short lived, with Cable improving from its losses, helped by a superb reading for UK Nationwide consumer confidence in March.

However, Nationwide cautioned that the spring in confidence may be brief and therefore cautious of reading too much into this.

Sterling gains against the euro look as though they have reached its limit.

Finally, there was no adjustment in policy from the Royal Bank of New Zealand as expected, with policy rates on hold at 2.5%.

However, governor Bollard did endeavour to talk the kiwi lower while stressing worries about the international outlook.

Concerns about kiwi strength will raise the spirit of FX interference though it may also mean a delay in rate hikes.

The announcement was fairly encouraging on the domestic outlook too.

Even though rates are ‘appropriate’ according to the RBNZ there is a good chance of a rate hike in Q3.

The NZD ignored Bollard’s comments, firming on the back of improved risk appetite.

UK Q1 GDP has come in at 0.2% which means the UK is confirmed in a technical recession (the final GDP figure is out later in the month). The news has trimmed 50 points from Cable and Sterling-Euro in quick time and will keep the Pound on the back foot for the rest of the day.

As we thought it was the construction sector that dragged the number down, showing a decrease of 3% in Q1 2012.

Eurozone data is light today so the focus will remain on the politics of austerity and how it continues to disrupt single currency governments.

With the Dutch cabinet resigning at the beginning of the week, the uncertainty over the outcome of the French election and German Chancellor Angela Merkel facing open rebellion by other European nations over her demand for further austerity, euro sentiment is taking a beating and dragging the euro lower with it.

Today marks the end of the two days FOMC interest rate meeting in the US.

It is expected that the Fed will keep rates and QE on hold, but as ever, it will be what the Fed indicates it will be doing over further easing later this year that moves the markets.

Wording will be key, but we can expect the Fed to continue to the cautious optimism tone of recent meetings.

Also later today is the US durable goods order figure, with consensus estimates showing a decline of around 1.5% in March?

Yesterdays appealing comments by Fed Chairman Bernanke, in addition to better than expected results for German IFO business confidence last month, have boosted risk assets whilst weakening the Greenback against Sterling and the euro. Markets appear to have shaken off, at least for now, growth worries stemming from weaker manufacturing confidence surveys in China and Europe last week.

The S&P 500 climbed 1.4% to 1,416.51, its highest close since May 2008.

The Dow Jones rose 1.2%, while the Nasdaq gained 1.8% to close at 3,122.57, its best finish since November 2000.

Ben Bernanke continued his stance that supportive monetary policy is still necessary particularly given worries about the jobs market and additional QE may still be needed.

Today markets will focus on US and French consumer confidence coupled with bill auctions in Spain and Italy. US consumer confidence is likely to slip slightly while the bill auctions are likely to be well received.

Sterling has failed to maintain gains above 1.59 against the Greenback over recent weeks let alone manage to test the key psychologically level of 1.60.

Therefore the current move above 1.59 could be a short one.

For the break above it will require an improved downtrend in the Greenback motivated by a sharp enhancement in risk appetite and/or a drop in US bond yields for Sterling to move much higher.

Both are unlikely.

Sterling will be susceptible to a general stronger Dollar for the rest of this year but could outperform against the euro.

Following an indifferent Asia trading session overnight where Japan kept interest rates at 0.1%, the market now awaits key data from the Europe and the US to drive sentiment for the rest of the week.The Greek debt swap deal has certainly added to this lack of direction providing little motivation to the markets yesterday.

The deal that amounted to a swap of £149 billion worth of bonds for a mix of new instruments ranging in maturity from 11 to 30 years had a relatively low uptake leading to bond yields from 14-19 %, the highest in Europe.

It appears the market is sceptical about this latest attempt by the Greeks to fend off their inevitable default and thus is looking for higher yields over shorter periods.

The euro continues its resilience at currently trades at 1.3142 against the Dollar.

Elsewhere in Europe today we have the German ZEW survey where we get an insight into medium term forecasts about Germany’s finances.

Over to the US and the Greenback should not be concerned by tonight’s FOMC meeting.

We may see the Dollar rally if Fed Chairman Bernanke is slightly more positive in his statement with further support from increasing theories that the Fed will begin on some form of sterilised QE shortly.

This coupled with expected stronger retail sales and positive National Federation of Independent Business (NFIB) report of small business bodes well for the US recovery and for President Obama in an election year.

Finally the UK Job market may be “turning the corner” according to a survey completed by recruitment firm Manpower.

The news comes ahead of the latest data tomorrow which are expected to show a further rise in unemployment.

Positive sentiment can now be found around the country in the East Midlands, North West and particularly London due to the Olympics.

Today Sterling is slightly firmer against the Euro and the Dollar trading at 1.1917 and 1.5667 respectively.

The US FED Reserve’s minutes from the meeting earlier this month were released yesterday evening and after several months of treading water the Fed decided to change its wording on interest rates. The Fed now plans to keep rates at extraordinary low levels until the end of 2014, which is a year further than their previous stance and signals to the markets that the Fed will continue to provide a huge amount of monetary support even as the economy is recovering.

The consensus was that the Fed would begin to withdraw support once they thought the economic recovery had gained traction but yesterday’s announcement has realigned the market view to expect low interest rates for a long time to come.

The immediate reaction in the markets was positive with stock markets rising and a large move in the EUR/USD pair from 1.29 to over 1.31, which given the size of the move we can expect slight retrace back towards the 1.30 level during today.

On this side of the pond, the UK economy contracted by 0.2% in the previous quarter, which was slightly more than the consensus estimate of -0.1% but not large enough to overly worry the markets given than ONS regularly adjusts initial GBP readings by over 0.1%.

In the lead up to the announcement Sterling was sold off across the board quite heavily but once the data was announced we saw a broad recovery in Sterling throughout yesterday.

The Bank of England minutes gave no more clues about when further QE might be launched, the Governor did a good job in the proceeding days to forewarn the market that QE is still on the table without specifying exactly when it might start.

Positive German business climate data was the main driver of the currency markets yesterday morning but the rally ran out of steam once the US opened and focus turned to the impending release of the Fed minutes.

Last night’s Fed Reserve meeting and Greece’s continuing struggle did nothing for risk appetite during Asia trading hours. The Reserve reemphasised the downside issues to growth and reduced its overall forecasts.

On a positive note, the Fed did acknowledge the possibility of easing options, suggesting additional QE thus giving a helping hand for risk appetite.

On the eurozone front- European politicians increased pressure on Greece by stopping the latest €8 billion aid payment and threatened to slash all financial aid if the country’s referendum now scheduled for December 4 fails to support the latest EU rescue package.

During yesterday’s emergency meeting, the Greek PM also revealed that the referendum will have a dual role; to decide the fate of the rescue package and also to ask if Greece wants to remain in the eurozone.

Of course, Greece is not the only Eurozone country under the cosh with the Italian political situation continuing to spiral out of control, as Berlusconi fails to push through legislation on structural reforms ahead of the G20 meeting beginning today.

It is questionable how long the risk rally will last, with the Euro, commodity and high beta emerging market currencies coming under further pressure.

While the urgent market focus will be on the G20 meeting starting today, the fact that leaders are now looking at the scenario of a Greek exit from the Eurozone while taking a tougher stance on the country emphasises how significant the referendum will be.

Until the referendum takes place, investors will remain highly sceptical and further risk aversion will remain.

As a result, risk assets are set for further declines.

Furthermore, as China has so far downplayed the scenario of addtional bond purchases from the EFSF bailout fund suggesting there will be no help from the far east any time soon.

The US’s Federal Reserve Board (FED) has attempted to twist the US long term and short term interest rates to help jump start the US economy.However there is another twist- this ruse  won’t actually do much to help consumers, borrowers or the housing market.

The Fed will go on a bond-buying spree — again — in an attempt to drive long-term interest rates lower than they already are.

The much-anticipated plan, dubbed Operation Twist by observers, should help push rates lower, boost the housing market, make it easier for consumers and business owners to borrow and help create jobs. That’s the Fed’s theory and intention.

But analysts say Operation Twist barely makes a dent in the problem.

There is plenty of liquidity out there already, and interest rates are already extremely low. Interest rates are not the obstacle to growth.

After a two-day meeting, the Federal Open Market Committee announced it will sell short-term Treasury bonds and reinvest about $400 billion in long-term Treasury bonds by the end of June 2012. It will sell Treasuries maturing in three years or less to buy Treasuries maturing in six to 30 years.

“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the Fed says in its statement. “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

Operation Twist differs from QE1 and QE2, the two quantitative easing programs the Fed previously implemented, because it will not require the Fed to print new money to fund the bond purchases. With Operation Twist, the Fed will simply shift its investments around rather than increase the balance of its portfolio.

Mortgage rates have been at their lowest levels in six decades, but millions of homeowners can’t refinance at the lower rates because they don’t have enough equity in their homes. Many potential buyers, who would like to take advantage of the low rates, don’t qualify for loans or are afraid to commit to a mortgage in a shaky economy.

The Fed said it will try to keep mortgage rates low by reinvesting in mortgage-backed securities as mortgages are paid off and as Fannie Mae and Freddie Mac repay debts they owe to the Fed.

Even if lower rates were the answer to dragging the economy out of the hole, Operation Twist still wouldn’t be enough to get the job done because its impact on long-term rates will be limited, analysts say.

Given the severity of the current crisis and the high unemployment rate, the United States needs the gross domestic product to grow at about a 5 percent to 6 percent pace, but that does not seem to be in the cards.

With so much doubt surrounding the effectiveness of Operation Twist, you may wonder why the Fed chose this maneuver. Simply put, it’s because the Fed had to intervene to show investors that it has not lost control of the nation’s economic situation.

And among the few tools the Fed had left in it’s shed, Operation Twist was the least controversial one.

Operation Twist met the least resistance among Fed members mostly because it differs from QE1 and QE2, the two quantitative easing programs the Fed previously implemented. Operation Twist will not require the Fed to print new money to fund the bond purchases.

With Operation Twist, the Fed will simply shift its investments around, rather than increase the balance of its portfolio- much like rearranging the deckchairs on the Titanic.

The Fed has more than doubled the size of its Treasury bond portfolio to about $1.65 trillion since the financial crisis started three years ago, and the Fed embarked on a bond-buying frenzy.

With more than 14 million people out of work, the unemployment rate stuck at 9.1 percent and no signs of improvement in the labor market, the Fed felt the pressure to act.

We got no blockbusting policy from Jackson Hole on Friday, but the Fed chairman failed to rule out further action if the US economic outlook continues to deteriorate.The markets were probably wanting something more concrete, but Uncle Ben did deliver the one thing guaranteed to lift equity markets – hope.

He talked about fiscal policy, probably paving the way for President Obama to announce stimulus measures in a speech on Sept 5th he also sounded reasonably positive on the economic recovery, which may or may not turn out to be ill judged given we have an important non-farm payroll number coming up this Friday.

Other US data of note this week include the minutes from the last FOMC meeting on the 9th August and consumer confidence, both due this afternoon.

Given the importance of Friday’s speech it is unlikely that we get anything unexpected in the Fed minutes.

Sterling should take a bit of back seat this week, it has been stuck in trading ranges against both the Dollar and Euro in recent weeks and with a lack of any substantive data due this week we can expect that to continue.

The little data that is due this week is mostly housing related and includes mortgage approvals and the Nationwide house price survey along with net consumer credit, manufacturing and construction PMI later in the week.

The Euro has started the week on a roll, gaining against both the Dollar and Sterling even without any real data to back up the rally.

The merger between two of the struggling Greek banks seems to have lifted market sentiment, but quite how two bad banks makes one good one is beyond logic!

FED Chairman Ben Bernanke has hinted that further Quantitative Easing is unlikely, saying instead the Fed is committed to keeping interest rates low until at least 2013.   Mr Bernanke indicated QE2 was on the way from Jackson Hole this time last year, and the markets responded better than even he could have predicted.

One of the aims of zero interest rates and QE is to force money into risk assets, and it looks like equity markets are setting up for the expectation of a further round of easing being announced. But they may be bitterly disappointed.

The key differences from last time are that the spectre of deflation, one of the key motivators for QE2, is not the threat it was a year ago and there is also dissent from 3 Fed board members further clouding the Feds ability to implement any new round of QE.

So how does the Fed’s announcement impact FX markets?

Safe haven currencies such as the Swiss franc, Aussie Dollar and the Scandinavian Krona’s look set to be very dependant on the outcome of Friday’s speech.

They have all benefitted from diversification out of Dollars and the prospect of further money printing by the US so we can expect significant moves in both directions depending on the content.

Special attention needs to be paid to the Swissie which has the SNB on the other side of the trade should QE3 go ahead.

Along with the US announcement (or not) Friday also sees UK GDP figures released. If we take the overall tone of recent UK data as a guide it is hard to be optimistic about UK growth.

There seems to be significant economic headwinds, set to get stronger as government spending continues to fall and companies hoard cash instead of hire workers.

In line with forecast is the best we can hope for. Later in the day, but before said speech, US GDP is also released along with the University of Michigan confidence survey.

Developments in US monetary policy last night make it unlikely that the Greenback is going to see much improvement over the coming months; at least until there are more positive signs of a US economic recovery.The US news has lead to a general rebound of exchanges around the world following heavy losses last week and early this week on fears there could be a new recession due to the euro zone and US debt problems.

Markets in London and Paris are up1.8% in opening trade, as shares in Frankfurt jumped over 2%.

The Dublin market had gained 1.9% in the first few minutes of trade.

Overnight Asian stocks fought back some recent lost ground, following a rebound in US shares, after the Federal Reserve’s unprecedented pledge on rates.

Tokyo’s Nikkei index closed 1% higher, while markets in Australia rose by 2.6% and shares in Hong Kong finished 2.3% higher.

The single European currency has been given a let off following the judgment of the ECB to purchase Spanish and Italian bonds – even though this will be short lived.

Sometime in the future EU officials will need to make tough decisions about the Euro’s future but the European Central Bank decision has given them some breathing space.

This will likely reinforce the support levels for the Euro against the major currencies for the next 2-3 months.

Finally, Sterling has enjoyed a rare period of stability, if not demand, whilst pressure mounts on the Dollar and Euro, with Gilt yields falling on an almost daily basis as overseas investors rush to buy the perceived safe haven Government bonds (still AAA …..).

The outlook for Sterling is less clear however, especially given the recent evidence weak outlook for the UK recovery and continued civil unrest.

So where does that leave the market?

Well, buying Swiss Francs and Yen primarily, with both currencies continuing to appreciate despite the best efforts of the respective Central Banks to curtail the move – the Yen is now just stronger than prior to the BoJ intervention last week, whilst the Swissy has made considerably gains since the SNB tried to hold the EUR/CHF at 1.1000.

Gold has also maintained its strong run ….