Tuesday September 21, 2004 - 09:18:23 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed statement closely watched
Activity will remain very subdued ahead of the Fed decision and rates should be raised by 0.25%. This rate hike is priced in and will not therefore benefit the dollar. The US currency will drop sharply if there is no rate increase, although this is unlikely. The statement may offer some slight dollar support, but it is unlikely to be strong enough to trigger aggressive dollar buying. The Euro will struggle to push above 1.2225.
The dollar and Euro have been trapped in narrow ranges. The Euro found support at the 1.2130 level and it strengthened back to 1.22 in Europe on Tuesday.
The Fed decision will dominate today and the most likely outcome is that there will be a further 0.25% rate increase to 1.75%. A 0.25% increase is priced in and an increase should not boost the dollar. The US currency will be very vulnerable if rates are unchanged, but this is unlikely.
The statement will be very important for the dollar and the language will be closely watched to assess whether there will be further rate increases in November and December. If the phrase 'measured' is dropped, there will be speculation over a pause in rate hikes. The Fed may also be calm over inflation which would dampen rate expectations and undermine the dollar. The Fed is, however, likely to keep all options open and will not want to unsettle markets.
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