Monday June 28, 2004 - 10:03:22 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar caution ahead of Fed
There will inevitably be caution ahead of the key US events later this week. The net risks suggest that the US currency is liable to weaken, especially as a 0.25% rate increase has been priced in, although there are dangers in aggressive dollar selling given that much of the market is positioned for a weaker dollar. Nevertheless, there is the potential for a fresh Euro attack on the 1.2185 level with a 40-50% chance of a move to 1.2250 over the next 24 hours.
The dollar was undermined on Friday by weaker than expected revisions to GDP figures, but the Euro was again unable to push through the 1.2185 level. The dollar recovered to 1.2125 in early Europe on Monday before sliding back to 1.2165.
This will be a very important week for the dollar with the Fed's interest rate decision on Wednesday and important employment data on Friday. The dollar has discounted a 0.25% rate increase and the dollar will, therefore, need a 0.5% hike or a hawkish testimony from the Fed to make strong progress. Overall, the Fed is likely to stick to a 0.25% rate increase while the statement is likely to aim to keep the Fed's policy options open. The statement may, therefore, be slightly dollar supportive if it warns over the possibility of a faster tightening, but the overall risks are likely to be weighted towards dollar losses.
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