US$ Slips Ahead of Fed Meeting Following Weaker than Expected U.S. Economic Data
The US$ consolidated in recent ranges overnight ahead of this afternoon’s Fed decision on interest rate policy. While the market is still pricing in a 10% chance that the Fed will in fact hike rates by a quarter percent at today’s meeting, it is all but sure that they will keep rates constant. The market will however be squarely focused on the commentary that accompanies the rate decision. Should Fed Chairman Bernanke’s commentary fall in line with his recent inflation-fighting rhetoric, the dollar could see significant strengthening, as the market will begin to shift its overall view towards higher US rates as the Fed aims to curb rising prices. However, yesterday’s worse than expected consumer confidence report, registering the fifth lowest reading in the index’s history, shows continued downward pressure on the U.S. economy, raising doubts about the extent that the Fed will be able to stem inflation through interest rate hikes throughout the remainder of the year. This morning we saw the release of durable goods orders, released in line with expectations and registering no gain. At 10:00 a.m. New Home Sales data is to be released expected to register 512,000 and post a month on month decline of 2.7%. Any weaker than expected data releases will help fuel negative sentiment towards the U.S. economy as a whole and will make the Fed’s case for price stabilization at the expense of growth that much less likely. This will ultimately contribute to continued US$ weakness.
The EUR was marginally higher overnight, bolstered by hawkish statements from key ECB members. ECB President Jean-Claude Trichet reiterated his bias towards fighting inflation stating that, “inflation in the euro area is likely to remain high for some time, moderating only slightly in 2009.” ECB member, Christian Noyer echoed Trichet’s statements saying that he believed that inflation was a bigger threat to growth than the sub-prime crisis and the most effective way to spur growth was through containing price increases. And yet further bolstering the common currency, ECB council member, Nout Wellink stated, “in 2009, inflation will be near 2.5% on average” led by surging oil prices that show no signs of dropping. The market is nearly certain that the ECB will hike interest rates next week, but the question remains as to whether this will be the start of a trend towards higher rates over the course of the year.
The JPY remained in recent ranges overnight as the market is focused on this afternoon’s Fed decision. With rates expected to rise in the Eurozone, traders continue to use the yen as a vehicle for the “carry trade”. In anticipation of the Fed’s policy statement accompanying their decision on interest rates, the market remains quiet and range bound. While any hint at future rate hikes will lead to dollar strength, a neutral statement could also lead to a weaker yen as the U.S. equity markets could stage a “relief rally” as rates will likely remain at current levels for some time.
The GBP was steady overnight despite slightly weaker than expected economic data. The U.K.’s current interest rate of 5% is the highest in Western Europe, continues to draw investors looking for higher yielding assets. However, despite the highest inflation in over a decade, the BOE has little to no room for interest rate changes in the near term, as the UK economy continues to struggle. BOE Deputy Governor, John Gieve, rejected using interest rates to tame soaring prices, saying to do so may, “potentially do grave damage to the rest of the economy because [the BOE] would have to move interest rates by so much” to curb the current rate of inflation. This afternoon’s Fed decision on interest rates in the U.S. and the accompanying statements should give the market direction, as the contrast of interest rates going forward should be more clearly defined.