The euro is the best performer today while the yen lags. If European policymakers show cohesion and creativity, it could be the start of a sustained recovery.
But I doubt it. We shouldn’t confuse EUR/USD gains with European progress. The larger driver is QE3 expectations.
My feeling is that bond bulls are overstating the likelihood of action in June and that Bernanke will disappoint on Thursday. Stocks and gold will fall while the buck rallies. Policymakers have frequently talked about setting a high bar for further action and have invested too much credibility to back down so quickly.
The high bar will remain in place until it’s overwhelmingly clear that inflation will be close to 1.5% and growth below 2.2%, the Fed will be reluctant to change gears.
