All eyes on Ben Bernanke’s testimony to Congress

A QUICK look at last week’s performance data for European equities and bonds would suggest at first glance that the economic outlook for Europe had improved. The DAX and FTSE tacked on gains while German and UK bond yields moved higher. However, looks can be deceiving: we received a barrage of weak UK economic data last week, including the highest level of jobless claims in 12 years and the sharpest decline in consumer spending in 11 months. Eurozone data was also anemic with investor confidence falling and service sector activity slowing. Yet the only market that responded appropriately was currencies. The euro and pound both ended the week lower with sterling closing at its weakest level in nine months.

There is not much on the UK calendar this week except for revisions to GDP (see below). However the Eurozone has German IFO, employment and final fourth quarter GDP figures scheduled for release. With no policy announcements expected from Greece, European markets should return to trading on G7 data. The recent disappointments in the UK should cause the FTSE and pound to underperform other markets as the data validates the dovishness of the Bank of England, which has left the door open to further easing. Last week the US Federal Reserve also shocked the markets with a 25 basis points discount rate hike and this week the markets will be looking for clarification from Ben Bernanke, who will be delivering his semi-annual testimony on monetary policy and the economy. If he telegraphs more normalisation, it would set American policy makers further apart from Europeans.

Kathy Lien is director of currency research at GFT.