News and opinion from the ground
Euro Advances As Forex Traders Price In Rate Hike Next Week
Thu, Jun 26 2008, 08:25 GMT
by Grace Cheng
GraceCheng.com
The US dollar fell against the Euro after the Fed held the main interest rate unchanged at 2%, ending a series of 7 consecutive cuts. What happened? Most market participants had expected the Fed to keep the rate unchanged anyway in Wednesday’s FOMC meeting. Initially the dollar traded higher but that subsided and traders began taking their profits on long dollar positions.
In the accompanying statement, the Fed said, “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.” They also said that “uncertainty about the inflation outlook remains high”, given the “continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations.” All except Dallas Fed’s Fisher, voted for no change. Fisher preferred an increase in the rate at this meeting.
The Fed is very unlikely to embark on a rate tightening cycle so soon after cutting rates so aggressively as the economy still looks so fragile. An August rate hike has been thrown out the window by many traders last week, but people are already betting on a September rate raise. On the other hand, the ECB is widely expected to hike rates next week to fight the threat of high inflation, and that expectation should keep the Euro on the offensive.
Forex Trading
EUR/USD rose to 12-day high of 1.5687, and the Euro rallied to an all-time high around 169.20 against the Japanese yen. EUR/USD’s topside targets are 1.5700-10, 1.5740. EUR/JPY has more potential to rise further as it is more lucrative for traders to seek yield when buying EUR/JPY since interest rates in Japan don’t seem to be going anywhere.
The dollar could be under pressure in the meantime at least till the ECB rate decision next week, but from a medium-term perspective, more hawkish rhetoric from the Fed could stem the dollar’s decline. The Fed is walking a tightrope right now: If they hike rates, that could be worse for an economy that’s on the brink of a recession. If they cut rates, they risk a weaker dollar and possibly higher oil prices.
Trichet Says
ECB chief Trichet told European Parliament on Wednesday: “I didn’t say we would envisage a series of increases. I said we could decide to move our rates by a small amount in our next meeting in order to secure the solid anchoring of price expectations.”
Economic Calendar for Thursday:
- Fed vice-chairman Kohn speaks at ECB conference 1130 GMT
- US GDP, core PCE, personal consumption 1230 GMT
- US existing home sales 1400 GMT
- NZ trade balance, GDP 2245 GMT
- Japan national CPI 2330 GMT
- Japan retail sales 2350 GMT
Published on
Thu, Jun 26 2008, 08:26 GMT
Archive
- Dollar Rally Likely To Stall Ahead Of US GDP Data
Published On Thu, Jul 31 2008, 08:39 GMT
- Near-Term Rally Of Dollar A Possibility As Fed's Plosser Voices Out Rate Hike Urgency
Published On Wed, Jul 23 2008, 07:21 GMT
- Stay Profitable In These Volatile Market Conditions By Making Quick Trades
Published On Mon, Jul 21 2008, 09:35 GMT
- Bernanke's Bleak Outlook Could Pressure Dollar To Further Record Lows Against Euro
Published On Wed, Jul 16 2008, 10:10 GMT
- US Dollar On The Defensive Ahead Of Bernanke's Testimony And Retail Sales Data
Published On Tue, Jul 15 2008, 09:14 GMT
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