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Dollar's Fall Could Be Limited As Fed Signals Rate Pause

Thu, May 22 2008, 15:08 GMT
by Grace Cheng

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The Fed has given us a bleak prognosis of the US economy as can be seen from the minutes of the FOMC meeting on April 29/30. Here are some downbeat forecasts: the Fed cut its forecast for economic growth to 0.3% - 1.2% in 2008, a far cry from its earlier projection of 1.3% - 2%. Not only that, Bernanke and colleagues expect the unemployment rate “to pick up further this year and to remain elevated in 2009″. According to the minutes, the decision to cut interest rates by 25 basis points was “a close call”, with some Fed officials noting that it wouldn’t be appropriate to cut interest rates further even if data suggested “that the economy was slowing further or even contracting slightly in the near term, unless economic and financial developments indicated a significant weakening of the economic outlook”. The text suggests that the Fed is definitely going to keep interest rates unchanged at its next meeting in June, especially since record oil prices are putting pressure on the inflation outlook. Futures on the Chicago Board of Trade show there is now a 90% chance the Fed will keep rates unchanged, compared to 88% Wednesday. What will this mean for the US dollar? With oil prices rising to new record highs almost every day, the US dollar is likely to stay suppressed, but the knowledge that the Fed is going to keep rates on hold could possibly limit the dollar’s fall, though not enough to halt it.


UK Retail Sales

UK retail sales fell for a second month in, April, dropping by 0.2%, less than the 0.5% drop expected. Compared to a year ago, sales increased 4.2%, which is a pretty strong gain amid falling property prices. Shoppers are buying more video games such as Grand Theft Auto IV and Wii Fit, causing sales in the “other stores” category to increase by 5.3% in the quarter through April, the most since the survey began in 1986.


Forex Trading

EUR/USD rose to a high of 1.5815, and its short-term bull target is possibly around 1.5850-60. USD/CHF did fall below 1.0275 to 1.0230, an expected bear target, but then bounced 80 pips from there to 1.0310. Nearest resistance is around 1.0390-1.0400. As long as USD/CHF stays above 1.0200-10, it is temporarily safe from more downside pressure. GBP/USD finally broke above a 2-month-old down trendline to surge above 1.9700 to a session high of 1.9850. In the short-term, 2.0000 could be its upside target once more.


Friday:

  • Swiss trade balance 0615 GMT
  • UK GDP 0830 GMT
  • Italy GDP 0900 GMT
  • US existing home sales 1400 GMT


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