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European and US summary

FOMC Unchanged, USD Holds Gains

Tue, Aug 5 2008, 22:47 GMT
by Korman Tam

Forexnews.com

8/5/2008 3:35 PM: EUR/$..1.5466 $/JPY..108.16 GBP/$..1.9566 $/CHF..1.0532 AUD/$..0.9146 $/CAD..1.0432

FOMC Unchanged, USD Holds Gains

The FOMC, as expected, left interest rates unchanged at 2.0% when it announced its decision earlier in the session. The accompanying statement offered a neutral bias, reiterating high uncertainty over the inflation outlook, continued softening in the labor markets and considerable stress on the financial markets. The Fed expects tight credit conditions, the ongoing housing contraction, and elevated energy prices to weigh on economic growth over the coming quarters. Balancing its view on growth, the Fed acknowledged “upside risks to inflation are also of significant concern to the committee”.

Although the greenback relinquished some of its overnight gains against the majors following the Fed policy announcement, it remained at 11-month highs against the Canadian dollar around 1.0450. The breaches of key levels recently, particularly 0.95 versus the Aussie, 1.0330 against the Canadian dollar and above 1.05 to the Swissie, mark a shift in sentiment with markets rewarding the greenback on a combination of sharp declines in oil and commodity prices and increasing uncertainty over the growth prospects of overseas economies. The euro’s inability to hold above its 1-year ascending trendline and subsequent breach of the 1.55-level paves the way for an imminent test of the 1.5300-1.5350 region, which marks the neckline support for a triple top formation.

US data released this morning included a better than expected non-manufacturing ISM at 49.5 for July and improving from 48.2 a month earlier. This corresponds with softer figures from the Eurozone and UK, which printed at 48.3 and 47.4, respectively. With crude oil extending losses beneath the $120-handle, losing another $2.24 per barrel in the Tuesday session, and economic fundamentals across the Atlantic deteriorating more rapidly than expected, we look for the dollar to extend its gains further in the months ahead amid heightened anticipation for policy easing from the RBA, BoE, and ECB.

 
Aussie Stumbles on RBA Outlook

The Australian dollar plunged to a four-month low at 0.9131 against the greenback following the Reserve Bank of Australia’s decision on monetary policy. Although the RBA left interest rates unchanged at 7.25%, the subsequent policy statement by Bank Governor Stevens raised the prospects for a shift toward potential rate cuts in the coming months. The statement offered a downbeat outlook, revealing that the RBA expects economic growth to be “fairly slow” and for demand to “remain subdued”. Lastly, Stevens said “the Board’s view is that the scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing”. The combination of a pullback in the price of gold and heightened expectations for a rate cut from the RBA will likely result in further underperformance in the Aussie over the coming months.

Published on  Tue, Aug 5 2008, 22:54 GMT

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