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Wednesday February 22, 2006 - 11:56:56 GMT
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Forex: Mellon FX Daily - U.S. Edition:

Key Points
• EUR-USD softer in Europe, USD-JPY remains below 119.00.
• FOMC minutes reinforce existing sentiments.
• NZD downside risk remains.
• UK MPC minutes 8-1, but possibly only a brief respite for GBP.
• Canadian CPI and US CPI feature today – Japanese data tonight.

Market Outlook

The FOMC minutes did not reveal anything new to the market. They said that the policy stance was close to what was needed to achieve their growth and inflation objectives, but added that further policy firming would probably be required. They also noted that core inflation was a little on the high side and that upside risks were in place given the high level of resource utilisation. The net result is the same – policy will be data dependent.

The story remains the same on EUR-USD, which has softened in Europe this morning. Overall downside risk remains, given the likelihood of Fed rate hike expectations increasing further in the weeks ahead, but there could be a period of consolidation this week. 1.1850 needs to hold to defer downside. Today’s US core CPI data will also be watched closely after last week’s stronger than expected core PPI (see below).

USD-JPY has shied away from 119.00 after testing close to there throughout the course of yesterday. Talk of official related offers around that level have been circulating in the market and this has reinforced it as an area of short-term resistance.

TheNZDremains weak following last week’s technical break and increasing perceptions that the prior Uridashi issuance story could turn into one of Uridashi redemptions over coming months. The price action confirms the likelihood of more losses in the next couple of weeks – risk to 0.6410 and 0.6240 initially.

The MPC minutes showed another 8-1 vote in favour of unchanged rates, with Nickell being the solitary dissenter (favouring a 25bp rate cut) for the third month running. Given recent rumours about the possibility of a 5-4 vote GBP rallied on the news, although we would not have much confidence in this being sustained.

Most MPC members believed that the near term outlook for consumption was better than at the time of the November Inflation Report and that as a central scenario GDP growth would gradually strengthen. However, they saw the risks to this view as being on the downside. Nonetheless, given this view of strengthening GDP growth there was a belief that a rate cut now would further boost consumption and housing at a time when it was not required. Nickell thought that growth forecasts were too optimistic and that the current level of interest rates would see inflation heading below target.

Even amongst the majority there is a fair degree of uncertainty about what lies ahead and it is worth noting that the observations in the minutes, particularly on consumption, came before the large m/m fall in January retail sales was known. Policy intentions, money market sentiment and GBP will all remain sensitive to data developments. An eventual softening in both rate expectations and GBP look likely over the next couple of months.

Day Ahead

Canada – CPI data has been very stable for some time and remains comfortably below 2%. As long as this remains the case the BoC will not feel under any pressure to add to the current pace of tightening.

US – last week’s strong core PPI number is just one month of data and isolated incidents of strength are not uncommon in any series. However, with the Fed having indicated that policy will be driven by the data and that they are wary of upside inflation risk, any strong or weak developments will affect market sentiment. Today’s core CPI data and next week’s core PCE prices release will also be seen in this light.

Japan – monthly data on the trade balance (January) and activity indices (December) are out tonight and both are likely to confirm the solid economic recovery now underway. Exports performed well throughout Q4, while the outcome on activity indices could influence market expectations about any possible revisions to Q4 GDP (2nd estimate released on March 13). However, the core CPI data (due next week) will have a more direct bearing on BoJ policy expectations.

Data/event EDT Consensus*
GB CBI manu trends survey (Feb) 06.00
CA CPI (Jan) y/y 07.00 +2.6%
CA CPIX (Jan) y/y 07.00 +1.7%
US CPI (Jan) m/m 08.30 +0.5%
US CPI core (Jan) m/m 08.30 +0.2%
BE GDP (Q4) q/q 09.00 +0.2%
BE Business confidence (Feb) 09.00 -2.3
JP Tertiary index (Dec) m/m 18.50 +0.3%
JP All-industry index (Dec) m/m 18.50 +0.5%
JP Trade balance (Jan, sa) 18.50 Y650bn
JP CSPI (Jan) y/y 18.50 -0.2%

Latest data Actual Consensus*
US ABC consumer conf (w/e Feb 19) -13 -11 last
AU Wage cost index (Q4) q/q +0.9% +1.1%
DE GDP (Q4 breakdown) q/q 0.0% 0.0%
FR Own company ind outlook (Jan) +11 +8
FR Business climate indicator (Jan) 105 104
FR H’hold consumption (Jan) m/m +0.9% +0.8%
ES GDP (Q4) q/q +0.9% +0.9%
IT Consumer confidence (Feb) 110 106.7
EU Current account (Dec, sa) -€5.3bn -€0.6bn
GB MPC minutes (Feb 8-9 meeting) 8-1
ZA CPI (Jan) y/y +4.0% +4.0%
ZA CPIX (Jan) y/y +4.3% +4.4%
EU Manu orders (Dec) m/m +2.5% -0.5%
* Consensus unless stated

2005, Mellon Financial Corporation Note: Although obtained from sources believed by us to be reliable, Mellon Financial Corporation and its affiliates cannot guarantee the accuracy or completeness of the information upon which this report is based. This report does not purport to disclose the risks or benefits of entering into particular transactions and should not be construed as advice in any specific instance. The views in this report constitute our judgement as of this date and are subject to change without notice.
Ian Gunner 44 20 7163 5996 06.40 EDT Monday May 31 2005


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