Wednesday October 5, 2005 - 09:52:21 GMT
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INVESTICA Ltd - www.investica.co.uk
The Euro/dollar rate was trapped within narrow ranges on Tuesday with neither currency able to break significant resistance points. The dollar was unable to break Euro support close to 1.19 and weakened back to 1.1960 in early Europe on Wednesday with a reluctance to take on aggressive positions.
Regional Fed President Fisher stated that inflation was at the upper end of the Fed's tolerance zone while other regional Fed Presidents also warned over the inflation threat in the economy. These comments will maintain expectations that the Fed will continue to push interest rates higher during the fourth quarter. There should also be confidence in the Fed's ability to control inflation and this will maintain confidence that yields will be high in real terms. Confidence will, however, remain fragile and could turn rapidly if US spending appears to be under serious threat.
Wall Street, for example, was weaker on Tuesday with a drop of over 90 points for the Dow Jones index and this suggests that Wall Street could be becoming less comfortable with the implications for the economy of higher interest rates. Consumer and business confidence levels will remain under close scrutiny in the short term. There will be greater concern over the economy if sentiment appears to be faltering as any deterioration would increase the risk of fears over stagflation whereby growth weakens at the same time as headline inflation rises.
Euro-zone producer price inflation increased to a 4.0% rate for September and the ECB will be concerned over the inflation outlook as it will be very determined to avoid secondary inflationary pressure. There is the risk that the ECB will warn over inflation and hint over higher interest rates on Thursday even though a change in interest rates is unlikely at this stage. The Euro-zone PMI index for the services sector rose to 54.7 in September from 53.4 in August.
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