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FOMC Cuts, Outlook Unclear

Wed, Apr 30 2008, 23:14 GMT
by Korman Tam

Forexnews.com

4/30/2008 3:20 PM: EUR/$..1.5616 $/JPY..103.90 GBP/$..1.9880 $/CHF..1.0359 AUD/$..0.9446 $/CAD..1.0058

FOMC Cuts, Outlook Unclear

The dollar was mixed following the FOMC’s announcement to cut rates by 25-basis points to 2.0%. The Fed reiterated that economic activity remains weak, while “household and business spending has been subdued and labor markets have softened further”. The Fed expects lingering tight credit conditions and the “deepening housing contraction” to weigh on growth over the coming quarters. Nonetheless, the statement did not give a clear indication of whether the Fed would continue easing policy over the coming months. The FOMC said that uncertainty about the inflation outlook remains high, but does expect it to moderate in the coming quarters. While it was unclear from the policy statement, we anticipate the Fed will leave interest rates unchanged for the remainder of the year.

Economic data from the US earlier in the session was better than expected, with the advanced reading of Q1 GDP unchanged at 0.6% -- beating out calls for a drop to 0.2%. The Q1 core PCE prices declined to 2.2% from 2.5%, while GDP sales posted a 0.2% drop versus a 2.4% increase in the previous quarter. The April ADP private sector payrolls number also reported better than forecast, posting a 10k increase, compared with estimates for a 60k decline and improving slightly from 8k in March. The April Chicago PMI survey improved from March, rising to 48.3 from 48.2.

 
Pound Recoups Housing-triggered Losses

The sterling recovered from a two-week low against the dollar in the New York session, bouncing sharply from 1.9626 to back above the 1.98-level. The catalyst for the slump was another bout of soft UK housing data. The April nationwide house price index declined by more than expected, falling 1.1% versus a 0.6% in the previous month. The annualized reading also disappointed, with consensus estimates calling for a flat reading, and instead declining by 1.0% versus a 1.1% increase.

Cable rebounded above the 1.98-level, with resistance seen at 1.9850, followed by 1.9880 and 1.99. Additional ceilings are seen at 1.9930, backed by 1.9960 and 2. Support starts at 1.98, followed by 1.9770 and 1.9740. Subsequent floors are seen at 1.97, backed by 1.9660 and 1.9630.

BoJ Unchanged

The Bank of Japan left policy unchanged at 0.5%, while issuing a somber assessment for the economy. New BoJ Governor Shirakawa said that the economy is slowing as a result of pricing pressures on energy and material costs. He added, “The nation’s economic-growth mechanism, led by production, earnings and spending, is also weakening”. The BoJ will likely leave policy unchanged for the remainder of the year given the slowing growth outlook.

Published on  Wed, Apr 30 2008, 23:16 GMT