Tuesday May 4, 2004 - 20:41:31 GMT
Share This Story
DailyFX.com - www.dailyfx.com
Muted Dollar Reaction As Fed Drops the Word “Patient”
Daily Forex Fundamental Report 05-04-04
· Fed Drops the Word “Patient”
· Stronger UK Economic Data
· Higher French Consumer Confidence
The euro crawled back above 1.20 to a high of 1.2122 during US trading. The dollar has become increasingly overbought and traders appear to be exasperated with the overextended nature of the dollar rally. Although the US economy is clearly improving, expectations for a rate hike have been too aggressive. Federal Reserve Chairman Alan Greenspan has warned that even if the Fed chooses to raise rates, a series of rate hikes this year is not guaranteed. With Fed Funds futures pricing in a 75bp rate hike by year-end, the euro was bound to recover as the market realizes that their expectations are overdone. Meanwhile, data from the Eurozone were in line, as French unemployment remained unchanged at 8.8% and Eurozone PPI increased by 0.6%. French consumer confidence did edge higher from
–22 to –20. Although a portion of the market still expects the ECB to ease monetary policy once again, they are not expected to deliver a change on Thursday. Recent domestic data has had a positive tone, which may provide a premature sign that the Eurozone economy is beginning to recover.
As expected, the Federal Reserve left interest rates unchanged at 1% today and dropped the word “patient” from their statement. However, the market was quite disappointed that the Fed chose to replace the word “patient” with “measured,” which gives no impression of timing. The Fed said that, “with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.” Other changes to the statement include upgrading the assessment of the labor market by noting that, “hiring appears to be picking up” and adding that price stability has moved into balance. The Fed is more optimistic on the economy, but the text of this statement suggests that rate hikes may come slowly, which makes the main focus for the market now the timing of the rate hike. What will determine or provide more clarity into the rate hike cycle will be upcoming economic data. The first of which is Friday’s non-farm payrolls report. Aside from that, keep an eye on inflation.
Stronger UK economic data sent the pound soaring throughout London and US trading. The Chartered Institute of Purchasing and Supply purchasing managers’ index (PMI) increased from 53.8 in March to 55.1 in April. Any figure above 50 indicates expansionary conditions. The global economic recovery has helped to boost demand from the US and Europe, resulting in an increase in new orders and a sustained recovery in Britain’s manufacturing sector. The retail sector continues to perform above trend, with the latest CBI distributive trades survey reporting an impressive increase in sales volumes during the month of April. The chief economist at NTC Research, which compiles the PMI survey believes that the data set has a high likelihood of being revised upwards. Consumer credit expanded by another GBP 1.7billion in March. The case for a 25bp rate hike on Thursday continues to build. As we have mentioned yesterday, 42 out of 44 economists surveyed last week, expect the BoE to raise rates despite the low level of inflation.
The rally in USDJPY appears to be losing steam as the pair fails to hold above 110. Japanese markets remain closed until tomorrow for the Golden Week holiday. Although China’s active measures to slow growth have certainly dampened the outlook for the Japan’s economy, the current level of USDJPY does not appropriately reflect the recent improvements in the economy. The Bank of Japan and Ministry of Finance continues to take active measures to support growth by keeping monetary policy accommodative.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."