Wednesday October 31, 2007 - 11:53:32 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed faces tough call
The Federal Reserve will face a series of tough decisions over the next few months. This weekâ€™s meeting is no exception as the Fed battles with persistent fears over recession and potential inflation risks.
Overall, given the net risks, the most likely outcome is for a further 0.25% cut today, although a 0.50% cut or unchanged rates should not be ruled out.
There should be a measured dollar reaction to a 0.25% cut while the currency will again be subjected to heavy selling pressure if there is a 0.50% rate cut. Unchanged rates would tend to strengthen the dollar sharply initially, although there could be a quick reversal on expectations that a cut has just been delayed. There would also be fears that the Fed is behind the curve unless the near-term economic data is stronger than expected.
The statement will also need to watched very closely as it will be a key guide to the Fedâ€™s thinking on underlying trends. The Fed will need to retain as much flexibility as possible and is likely to say that future decisions will be dependent on forthcoming data.
A greater emphasis on inflation risks and confidence in the underlying economy would, however, represent a much more positive dollar backdrop than if the Fed concentrates on the downside economic risks.
The Wall Street and credit-market reactions will also be very important for the overall dollar direction, especially against Asian currencies.
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