Monday September 20, 2004 - 21:29:41 GMT
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Market On Fed Watch – Central Bank Expected to Raise Interest Rates By Quarter Point
DailyFX Forex Fundamentals 09-20-04
·Market On Fed Watch – Central Bank Expected to Raise Interest Rates By Quarter Point
·Pound Slips As Mortgage Lending Slows
·Bank of Canada Governor Dodge Says “Further Tightening May Be Necessary”
With Japan closed for a holiday and no economic data scheduled for release from the US and Europe, the market is currently on Fed Watch. In what is likely the most anticipated event this week, the Federal Reserve is expected to announce their decision to raise interest rates by a quarter of a point to 1.75%. The move is completely priced into the market and will probably be viewed as normalization from extremely accommodative levels rather than an effort to curve rapidly rising inflation or overly excessively growth. The Fed is becoming increasingly sensitive to the softening inflation pressures and as such, is becoming more cautious with raising rates. Over the past few weeks, comments from Fed officials confirmed their softened bias, which means that the actual tightening should have a limited impact on the markets. Instead, the FOMC statement will have a higher importance. We expect the statement to say that overall growth is picking up while core inflation is declining. A recent paper by Fed Governor Bernanke finds that the FOMC statement has a greater impact on the market than the tightening itself and this relationship should continue to hold true on Tuesday. Don’t expect much from the Fed, the only shock would be no move, which is extremely unlikely. We expect rates to be at 2% by year end.
Once in a while we hear from the International Monetary Fund (IMF) and are reminded of the world’s persistent concern about the nation’s growing current account deficit. This morning, IMF Director Rato said that the decline in the dollar makes sense fundamentally, which is true, but only on a more macro long-term basis. Comments like these hold minimal weight in the market these days, when foreigners are providing ample funds to make the deficit a back burner issue for the time being. Meanwhile, today, the Swiss franc lost value against both the euro and dollar. Switzerland is one of the only countries where inflation is growing at a faster pace. Most other countries are facing softening inflation pressures. There could be some respite for the Franc tomorrow when we receive the trade balance and industrial production reports. Exports have exceeded imports for 18 consecutive months in Switzerland and we do not expect the trend to change. Industrial production on the other hand is expected to rebound sharply following the decline last month.
The British pound began the week lower as mortgage lending weakened in the month of August. The BBA reported that mortgage lending fell to the weakest levels in over 2 years while the BSA reported softening approvals. The data is fairly consistent with the gradual slowing in the housing market and we expect the RICS house price balance due out later this evening to confirm this trend. If it were up to only UK data, the pound would remain under pressure this week since the Bank of England’s minutes from the September 8/9 monetary policy meeting and their Quarterly Inflation Bulletin are both likely to reflect the culmination of the central bank’s aggressive tightening policies. However, all of this is pretty much priced into the market, which means that it should have a minimal affect on the pound. Instead, the FOMC meeting tomorrow poses an event risk for the dollar and hence the GBPUSD cross.
Japanese markets were closed for the Respect For The Aged Day last night, which provides us with an easy excuse for another day of contracting ranges in USDJPY. The continual contraction only poses a greater risk of a significant breakout. Although there is another holiday later this week in the Land of the Rising Sun, the merchandise trade balance and tertiary activity index could affect the pair. The market has just started to become use to weakening data in Japan, therefore a narrower merchandise trade balance and softer tertiary activity should come as no significant surprise.
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