Wednesday September 22, 2004 - 09:40:25 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro likely to hit resistance
US interest rate expectations are unlikely to weaken significantly further in the short term. The dollar will, however, be vulnerable if forthcoming economic data is weak as this will increase speculation over a Fed pause. The Euro data has not justified aggressive buying and the Euro is likely to hit tough resistance close to the 1.2350 level with a modest retreat likely. A move through 1.2350 would, however, have worrying medium-term implications for the US currency.
The markets were much more active than expected ahead of the Fed interest rate decision with the Euro strengthening to 1.2280. The dollar weakened to a low of 1.2345 after the Fed decision before pushing back to 1.2310 in early Europe on Wednesday. Given that the market has been stuck in a narrow range, there will be a strong temptation for funds and short-term players to push for a much bigger break through further speculative Euro buying.
The Federal Reserve decision met market expectations with a 0.25% rate increase to 1.75%. In the statement, the Fed was generally confident over growth prospects, stating that the economy was regaining traction. The comments on inflation received greater attention with the Fed stating that inflation and inflation expectations had eased. This suggests that there is no need for aggressive rate hikes and the Fed retained the expectations of monetary tightening at a measured pace.
The implications at this stage are that the Fed is likely to increase interest rates again in November if the economy remains on track. There is, however, the potential for a pause at 2.0% and the US currency will also be more vulnerable to weak economic data.
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