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What goes up, must come down and after hinting at another round of QE3 on Wednesday in front of US lawmakers Ben Bernanke rowed back some of those comments yesterday. The Fed are now “not prepared at this point to take further action” and that inflation is now “higher and closer” to the Federal Reserve’s target. So those gains that had helped equity markets on Wednesday were swiftly lost while the dollar stiffened after a calamitous sell-off.

The ratings agency Standard and Poor’s followed Moody’s last night in downgrading their outlook of the US economy to negative although market reaction has been minimal so far as we await the news of the latest round of European bank stress tests. These tests apply to 90 European banks and reports have suggested that up to 30% could fail. Most commentators believe these tests are too lax however as they do not include the probability of a European country defaulting on its debt (here’s looking at you Athens). Even so, there is the prospect for volatility come the close of play.

The picture for Europe did improve a tad yesterday although the euro remains weak against its crosses into the stress test announcement. The Italians managed to complete their bond auctions yesterday but not without the yield increasing by 21% to 4.93% while the bid to cover ratio, the amount of people wanting to buy the bonds, rose to 1.93 from 1.28. Today we of course have votes of confidence moving through the Italian government which could cause some further event risk later in the day.

Sterling is quite happy at the moment too sit in the shadows and watch the dollar and the euro disintegrate but I would be very wary of believing this to be some sort of Lazarus-like reemergence of sterling. It has benefited this week primarily due to a lack of data to remind the market that the UK economy is still in a bad way. I believe that this March higher will be stopped come next week’s retail sales number on Wednesday.

The data calendar today will largely take a back seat to the stress tests; we do not anticipate that US CPI due at 13.30 will be a large market mover and instead we believe it will be headlines out of Europe and the US regarding their various debt crises that will provide the volatility today.

Have a great weekend.

Latest exchange rates at time of writing