Wednesday June 30, 2004 - 09:27:34 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed will determine dollar direction
The Fed rate decision and statement will dominate today and trading is likely to be subdued before then. The most likely outcome is a 0.25% rate hike and a balanced Fed statement. If this is the case, the dollar would be liable to weaken towards at least 1.2180 as a 0.25% rate increase has been discounted, but substantial selling pressure is unlikely, especially with the employment data on Friday. There is a 20% chance of a significantly more aggressive Fed stance which would push the dollar to at least 1.20.
The dollar found support at the 1.2185 level against the Euro on Tuesday and the US currency strengthened to a high of 1.2080 after stronger than expected US data, with consumer confidence strengthening to 101.9 in June from 93.1 the previous month. After a move to 1.2070 in early Europe, the dollar weakened back to 1.2115. There will be a further closing of positions ahead of the decision.
There is an 80% chance that the Fed will increase rates by 0.25% with a small possibility of a 0.5%. There is very little chance that rates will be left unchanged, although the dollar will slump if they are. The accompanying statement will be scrutinised closely. In particular, the fate of the word 'measured' will be very important for the market. Its removal would reinforce speculation over a 0.5% rate hike in August. The most likely outcome is that the Fed will aim to maintain a balanced view at this stage.
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