Monday May 3, 2004 - 20:13:21 GMT
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Fed Expected To Drop “Patient” From FOMC Statement
Daily Forex Report 05-03-04
· Stronger Eurozone PMI
· US ISM Lower, But Still Near 20-Yr High
· Fed Expected To Drop “Patient” From FOMC Statement
With London closed for holiday, the EURUSD fluctuated within a rather tight trading range. As expected, EU enlargement on May 1st passed without much fanfare. The euro received some support today from positive M&A news – US based Flex-N-Gate will be purchasing the German unit of MG Technologies AG for EUR430mln (the form of payment was not disclosed). The best way to characterize trading today is “the calm before the storm,” since this week is a very busy week in the currency market. There are four central banks meeting to decide on monetary policy (ECB, Fed, BoE, RBA) and US non-farm payrolls is scheduled for release on Friday. The only central bank that has the risk of changing rates is the Bank of England. Meanwhile, Eurozone PMI increased by fastest pace in 3 years. With the index increasing its distance from the contractionary / expansionary 50-level, the global recovery is beginning to benefit the manufacturing sector.
Tomorrow’s FOMC rate decision is one of the most important events this week. Although rates are expected to remain on hold at 1%, the market expects the Fed to alter the language in their statement and in particular, drop the word “patient.” Collectively, Fed officials have been increasingly hawkish and we expect tomorrow’s FOMC statement to reflect this change in sentiment. Since the last FOMC rate decision on March 16th, non-farm payrolls, durable goods, retail sales, consumer confidence, housing starts, construction spending and new/existing homes sales have all increased strongly. Moderate gains were seen in CPI and PPI, while capacity utilization remained unchanged and industrial production declined -0.2%. Data is supportive of an official upgrade in sentiment - 75bp of tightening has been priced in until year-end. Meanwhile, the headline US ISM survey decreased from 62.5 in March to 62.4 in April, reflecting a drop in inventories. However, the index still holds near its 20 year high of 63.6, which indicates that the manufacturing sector recovery remains strong. Construction spending also grew 1.5% mom, compared to a drop of –0.1% in February.
The British pound fell marginally today with London out of the picture. The Bank of England is the only central bank that the market expects to move on monetary policy. Last week, the CBI industrial trends survey nudged lower, while consumer confidence improved and house prices continued to accelerate. Strong consumer spending and an expanding housing market bubble provide continual arguments in favor of a rate hike. However, low inflation may inhibit the BoE from making an immediate move. Regardless, 42 out of 44 economists surveyed by Bloomberg on Friday expect a 25bp rate hike on May 6. Therefore should the Bank of England fail to deliver the expected rate hike, we could see the pound tumble even further.
Over the weekend, Bank of Japan Governor Fukui said that that the BoJ plans on maintaining an easy monetary policy until inflation stops falling. Clearly, the BoJ plans on making sure that economic conditions continue to encourage recovery and will take proactive measure to ensure that it does. Fukui added that, "even if we pass through that stage of experiencing CPI growth of at least 0%, any major policy alterations will be weighed on a continuous plane." There should be thin trading in the yen this week, with the markets closed until Wednesday for the Golden Week holiday. However, USDJPY continues to benefit from news of China’s measures to slow growth.
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