Thursday June 15, 2006 - 10:50:31 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed tightening too far
The dollar strengthened after the US consumer inflation report on Wednesday, but was unable to break resistance close to 1.2530 and the US currency then retreated sharply towards 1.2650 with rumours of central bank Euro buying.
The headline 0.4% US consumer price increase for May was in line with market expectations as energy costs rose by 2.4% over the month while the underlying rate was higher than expected at 0.3%. The core rate was again influenced by a strong increase in rents and the impact is tending to distort inflation data upwards, but there was still a 2.4% core increase for the year with an annualised rate of near 4.0% over the past three months.
Markets have moved close to pricing in a 100% chance of a June interest rate increase and a 40% chance of an August increase.
There is, however, a growing risk that the Fed will tighten too far and trigger a sharp slowdown in the economy and these concerns are illustrated by the inverted yield curve. Concerns over a slowdown in growth will make it more difficult for the dollar to gain ground from expectations of higher interest rates. The US growth data will, therefore, be watched closely on Thursday, although the impact should be measured unless there is a sharp weakening in the growth indicators.
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