Monday January 31, 2005 - 11:12:18 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed holds the key
The dollar weakened to a low of 1.3070 against the Euro after the weaker than expected US GDP data on Friday, but the Euro was unable to break resistance around 1.3080 and weakened back to 1.3035. The US currency was also marginally stronger in early Europe on Monday, strengthening to a high of 1.2975.
Fourth-quarter US GDP growth slowed to 3.1% from 4.0% the previous quarter. The figure was dragged down by weak exports which cut growth by 1.7% and will maintain concerns over the US current account position. The inflation indicators revealed a slight increase in the deflator to 2.0% while the core personal expenditure index, a figure closely monitored by Fed Chairman Greenspan, increased to 1.6% from 0.9% the previous quarter and there will be certainly be concerns over inflation. The data overall shows a small, although not so far alarming, increase in inflation. The data should encourage the Fed to maintain a steady tightening this week with a Fed funds increase to 2.5%. The widening short-term yield gap over Euros will offer some dollar support, especially if ranges remain narrow. There will be some speculation over a more aggressive Fed stance which will offer initial dollar support, but the US currency would then be slightly vulnerable after the decision if the Fed indicates further measured increases.
There will be near-term market caution ahead of the key events this week, starting with the Fed interest rate decision on Wednesday and followed by the payroll figure and G7 meeting on Friday. There is a considerable risk that the events this week will not provide a major trading stimulus and this would encourage a further period of range trading. There is also evidence that the G7 are pushing development issues higher up the G7 agenda, possibly at the expense of currencies. The overall risks associated with the G7 meeting are for a weaker US currency as the markets have downgraded the expectations of a Chinese move.
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