Tuesday May 3, 2005 - 09:57:53 GMT
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INVESTICA Ltd - www.investica.co.uk
What to expect from the Fed
The dollar trading ranges were narrow on Monday with liquidity drained by the UK market holiday and caution ahead of the Fed interest rate decision. The dollar retained a firm tone in early Europe on Tuesday before retreating to 1.2860.
The US ISM report for the manufacturing sector was disappointing with a decline to 53.3 in April from 55.2 the previous month. The employment component fell to 52.2 in the month and the orders component also dipped to 53.7 from 57.1 previously. The immediate implications will be limited, especially as there was a bigger than expected increase in construction spending and the dollar will still be able to gain relative support from the poor Euro-zone data. The dollar will, however, be more vulnerable if there is a sustained slowdown in US consumer spending and disappointing data. The Friday payroll report will, therefore, inevitably be very important.
The US FOMC meeting should decide on a 0.25% rate increase for Tuesday and there will be major surprise if there is a different decision. The statement will be watched very closely for evidence of greater Fed concern over inflation. A removal of the word measured in the statement would grab headline attention and would offer immediate dollar support on speculation over a faster pace of tightening. The overall tone of the statement will also be important. In particular, the Fed may want to gain greater flexibility given the uncertainty over monetary policy requirements over the second half of the year. Any initial dollar gains may, therefore, be reversed due to further consideration that the Fed may also consider a pause in tightening. From a medium-term perspective, the combination of slowing growth and rising inflation would be unlikely to offer dollar support.
The concerns over a French referendum no vote may ease slightly following a small shift in opinion polls with the yes vote strengthening and this may ease Euro political concerns slightly, but underlying unease will persist. The Euro will also be more vulnerable on economic grounds, especially after the PMI contraction seen for April. Confidence will weaken further if there is a poor services data figure on Thursday.
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