The widening gap between US and EMU events became even clearer this week. In Europe, macro data came surprisingly high in July’s PMI, but the main concern was obviously on the stress tests and their implications. The combination of “less bad” macro data and a powerful stress test is precisely what saved the US back in 2009.

This time around, however, on the other side of the Atlantic the focus remains on the much feared double dip.

Bernanke’s remarks on his Congress appearance corroborated that the Fed shares the view that risks are increasing. Bernanke refrained from saying what measures the Fed might take if a sharper slowdown were to happen, but his “greater than normal” uncertainty is clearly a reason to expect a more cautious Fed. We are revising our Fed forecast and now expect gradual increases in the funds rate in the third quarter of 2011.

Brazil’s central bank decision to hike by 50bp (instead of 75bp) and Banxico’s recent action suggests some countries in Latin America are aware of the convenience of not raising too early or too fast. In Asia, however, strong growth (as we expect in Korea next week) is still putting pressure to continue tightening.

Given the more uncertain outlook and low risk of inflation, the Fed will maintain low rates for a prolonged period of time. BBVA Research has pushed back its baseline forecast for the first fed funds rate hike to 3Q11 from 1Q11.

The euro has recently recovered much of the ground lost against the USD, but we consider recent euro strength a temporary factor, and our call is for a strengthening of the dollar in the medium-term.

The Central Bank adjusted the SELIC up by 50bps to 10.75%. This decision consolidates the view that monetary tightening cycle in Brazil is going to be softer than expected.