Tuesday December 13, 2005 - 11:05:22 GMT
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INVESTICA Ltd - www.investica.co.uk
What to expect from the Fed
The Euro gained further strong support in Europe on Monday with a move through important resistance levels. The Euro pushed above 1.1870 and 1.1900 with a move to 1.1980 before a corrective retreat on Tuesday. Expectations of a tough stance from the ECB and a strong German ZEW report also offered Euro support. The Fed stance should offer some short-term dollar relief.
There was further speculation that the Federal Reserve would amend the language in its Tuesday statement and effectively signal that US interest rates were close to peaking. The shift in market expectations was illustrated by the narrowing of the dollarís yield premium on two-year notes despite the very strong probability of a 0.25% Fed funds increase on Tuesday.
The Fed statement will be very important and the US currency will be in a position to recover at least temporarily if the Fed takes a tough inflation stance, especially as overall yield spreads are still offering dollar support. The Fed will be reluctant to soften its inflation attack at this stage and the dollar should be able to avoid heavy selling pressure after the decision. Underlying capital flows are, however, likely to be less favourable as capital repatriation fades while the evidence also suggests equity outflows have increased. This combination will make it more difficult for the dollar to strengthen over the next few weeks.
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