Friday August 26, 2005 - 12:36:17 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed policy in focus
Trading volumes are likely to fall sharply during Friday with markets aiming to trigger stop-loss levels. This could lead to erratic trading if the market manages to break support levels. In particular, a break above the 1.2330-1.2350 Euro resistance band would be significant.
The dollar was undermined to some extent by high oil prices and debt downgradings for Ford and GM on Thursday. GM has extended heavy discounting and this is likely to raise some concerns over the level of consumer spending, but there will be short-term uncertainties whether GM difficulties reflect the company performance or a wider dip in consumer spending. If there are further corporate reports of weak spending, wider confidence in the economy and spending trends could start to follow and this would undermine the dollar. These risks will increase if oil prices remain at very high levels above US$65 p/b.
Jobless claims fell to 315,000 in the latest week, but this failed to have a significant impact. The dollar should still be able to gain underlying support from yield considerations, especially as the Fed appears more concerned with inflation than growth at this stage. In this environment, the Fed will look to maintain policy tightening even with high energy costs. The equation will start to change if demand falters as the Fed would then be under pressure to stop the process of tightening even if headline inflation rises. This is likely to be a key fourth-quarter focus for the markets.
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