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Wednesday May 4, 2005 - 14:23:47 GMT
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Forex Market Commentary and Analysis (4 May 2005)

The euro moved sharply higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2975 level and remained supported around the $1.2865 level. The big news on traders’ desks this morning was a public blunder by the Federal Open Market Committee meeting yesterday afternoon in which Fed policymakers changed their monetary policy statement some 99 minutes after it was first issued. The FOMC tightened monetary policy by 25bps yesterday, as expected, raising the federal funds target rate to 3.00%. In the Fed’s first statement yesterday, policymakers failed to reiterate recent FOMC statement language that read “Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices." The first sentence did not appear in the Fed’s first version but appeared in version issued more than 1 ½ hours later. The second sentence was omitted from both versions. The markets were largely confused about the final statement with some traders thinking the second version evidences a more hawkish Fed and others saying it didn’t change the complexion of the initial statement. The inclusion of the first statement suggests the Fed is more concerned with the prospect of higher inflation than it is with recent signs of a “soft patch” in the U.S. economy. Australasian dealers pushed the dollar lower by lifting the common currency above the $1.2900 figure and it quickly rocketed to the $1.2960 level. Dealers focused on the “remain well-contained” statement in describing inflationary pressures and the fact that the second statement did not report that the “rise in energy prices…fed through to core consumer prices.” The fed funds futures market is now trading at levels that suggest the Fed has around 75bps of monetary tightening left this year. Other more hawkish dealers think the Fed may try to push the fed funds target rate to 4.00%, but most concede that the U.S. economy’s ability to emerge from the recent “soft patch” will dictate policy moves. The situation is quite different in the eurozone where the European Central Bank convened today and decided to keep the base repo rate unchanged, as expected. The markets perceive there to be a growing possibility that the European Central Bank may actually expand monetary policy by lowering rates just weeks after ECB officials made it clear the next move would be to tighten policy. Italian government official Baldassari today said the ECB should “reduce the interest rate in Europe.” The ECB has not changed interest rates since June 2003. Data released in the eurozone today saw the April EMU-12 service sector business activity index recede to 52.8 from 53.0 in March. Other data released in the eurozone today saw French February retail sales up 0.2%, compared with a 0.2% decline in January. Other data saw EMU-12 March retail sales up 0.3% m/m and up 1.4% y/y while German retail sales were up +0.5% m/m. Some market participants believe the euro was bid higher today because likely French voters in this month’s vote on whether or not to adopt the European Constitution are said to slightly favour this constitution now over the opposition. Euro offers are cited around the $1.2975 level.


The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥104.20 level after hitting stops below the ¥104.90/ 70 levels. Today’s low print represents the pair’s lowest level since 17 March and yen bulls are waiting for the pair to test key technical support around the ¥104.10 level. Japanese financial markets remain closed for the Golden Week holiday and will reopen on Friday. Option traders had cited an option barrier around the ¥104.50 level but this was easily absorbed. Dollar offers are cited around the ¥105.00/ 30 levels. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥135.00 figure and was capped around the ¥135.75 level. Euro bids are cited around the ¥134.95 level. Euro offers are seen around the ¥135.80 level. The British pound receded vis-à-vis the yen as sterling tested bids around the ¥197.90 level and was capped around the ¥199.10 level. In Chinese news, the discount on one-year non-deliverable yuan forwards fell to 4,850 from 5,100, signaling some expectations of a near-term RMB revaluation by China are fading.

The British pound rocketed higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.9030 level and was supported around the $1.8915 level. The move by the Fed to alter its monetary policy statement prompted some sterling buying activity during Australasian dealing. Data released in the U.K. today saw the April CIPS construction purchasing managers’ index improve to 54.8 from 54.7 in March. The housing activity sub-index came off in April to 48.9 from 49.5 in March. Bank of England’s Monetary Policy Committee will convene on Friday and Monday to consider the course of interest rates in the U.K. Most MPC-watchers believe the central bank will keep policy unchanged as it has since last summer. Bank of England’s Quarterly Inflation Report will be released on Wednesday. On the political front, Prime Minister Blair’s Labour Party looks set to retain power in tomorrow’s general election but the question remains how much of a majority – if any – they will retain in Parliament. Cable bids are cited around the US$ 1.8960 level while cable offers are seen around the $1.9045 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.6825 level and was supported just below the ₤0.6800 figure.


The Swiss franc gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1880 level and was capped around the CHF 1.1990 level. Today’s low was around a key technical level, the 50% retracement level of the move from CHF 1.1735 to CHF 1.2015. Stops were hit below the CHF 1.1910 level during the dollar’s decline today. Swiss National Bank member Hildebrand is scheduled to speak later in the day. Dollar offers are seen around the CHF 1.1920 level. The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5400 figure and tested offers around the CHF 1.5435 level.


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