Tuesday March 28, 2006 - 09:55:36 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar braced for Fed decision
The dollar was unable to secure strong buying interest on Monday with inevitable market caution ahead of the Tuesday US Federal Reserve interest rate decision. The US currency failed to hold gains beyond 1.20 and weakened to 1.2065 on Tuesday after a stronger than expected German IFO index report which rose to 105.4 in March from 103.4.
As the two-day Fed meeting got underway, markets were still pricing in a 100% probability of another 0.25% rate increase on Tuesday to 4.75% which would be the 15th consecutive increase. The dollar will be very vulnerable if there is no increase but, assuming that there is an increase, the statement will receive most attention. Given that markets are also expecting a further rate increase in May, the dollar will need a tough and uncompromising stance from the Fed to make significant headway. The dollar will also drop sharply if there is no rate increase.
The currency will also be vulnerable if there is a dovish statement, especially if there is a clear hint that rates have peaked. Volatility will be a high risk after the decision, especially with the uncertainty triggered by a new chairman and two new board members. The most likely outcome is that the Fed will signal that further increases might be required, but the Fed is likely to signal that rates should not need to rise above 5.0%.
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