Wednesday February 2, 2005 - 11:24:55 GMT
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INVESTICA Ltd - www.investica.co.uk
How will the dollar react?
The Euro strengthened to 1.3070 in early Europe on Wednesday with some evidence of Euro bond demand form Asian investors which was supporting the currency.
The US ISM manufacturing index was slightly weaker than expected at 56.4 for January, but the impact was offset by a strong employment component. The employment index rose strongly to 58.1 and this will boost optimism over the Friday payroll report, potentially pushing the consensus forecast to above 200,000.
Short-term attention will be dominated by the Federal Reserve interest rate decision. There is a strong probability of a further 0.25% rate increase by the Fed to 2.5%. If so, the statement by the Fed will be very closely watched for evidence of the Fed's stance over the next two meetings. In particular, the phrase measured tightening will be closely watched. If the phrase is dropped there will be greater speculation that the Fed is more concerned over inflation and expectations over a 0.5% rate increase for March will intensify. If the phrase is maintained, speculation over a 0.5% rate increase in March will decline. The dollar is likely to gain if there are hints over a 0.5% increase while suggestions over a continuation of 0.25% increases would be likely to weaken it slightly. From a medium-term view, any comments on inflation targeting will be significant although these are more likely to emerge when the minutes of the meeting are released.
President Bush's State of the Union address will also be watched for evidence on fiscal and budget policy. The dollar may gains slightly if there is a strong commitment to budget restraint, but the markets will want to see a clear commitment and will be looking at the budget presentation next week.
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