Thursday June 30, 2005 - 10:08:53 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed statement under scrutiny
The dollar strengthened to near 1.20 against the Euro on Wednesday, but was unable to pierce this level and the US currency retreated rapidly to beyond 1.21 before recovering back to 1.2065. The Euro secured support from rumours of central bank buying and by rumours that the Saudi king had died.
The final US GDP figures for the first quarter were in line with market expectations with the estimate revised up to 3.8% from 3.7%. The inflation figures were potentially significant with the core PCE inflation index weakening to 2.0% from the previous 2.2% estimate. The lower rate should lessen the need for a further tightening of US monetary policy to control inflation. The inflation data in the personal spending data will be watched closely today for inflation clues. The other US data should not have a major impact unless it is extreme, although a persistent pattern of weakness would cause some growth concerns.
The Fed policy decision will be important for the markets on Thursday. There is a very strong probability of a 0.25% increase and the main focus should be on the statement. Any hint of a pause in rates would tend to weaken the dollar, but the Fed will probably indicate that further rate increase are likely at this stage and this should help support the US currency. There will be speculation over a cut in ECB interest rates next week and the short-term yield spreads will continue to underpin the dollar unless there is a surprise Fed decision not to raise rates today.
There is still the potential for central bank Euro buying close to the 1.20 level and the Euro has also shown some limited recovery on the crosses which will help support the currency against the dollar. Persistent central bank buying would strengthen the potential for a Euro rally.
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