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1/5/2008 − the current market sentiment

Thu, May 1 2008, 14:34 GMT
by Walid Salah El Din

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An Increased possibility that the worst has come to the financial market because of the credit crunch is helping the greenback which has just had .255 cut yesterday. The cut by just .25% has sent many messages to the market. Yes it has left the door opened for further cuts but there can be a hold and this was not priced in the market before. This current market sentiment lighten the weights on the greenback and decreased the pessimism with the first by fed's cut by .25% and the door is open now for a pause waiting new data. Yesterday, we have had April Chicago PMI manufacturing has come at 48.3 the market was expecting it to be lower at 47.5 and today we have had the same ISM manufacturing number of March which was 48.6 and the market expectations were a decline to 48.

Today's release of the core PCE price index rise by .2% not by just .1% as expected has also signaled high inflation pressure on the fed to stop easing the yearly core figure yesterday came 2.2% higher than the market expectation of 2.1% in the first quarter of the year and also the consumption get better for the first time increasing .4% which account for more than 2/3 of the US economy.

Yesterday we have had a gain Plosser the fed member of Philadelphia and fisher the fed member of Dallas opposed the majority preferring no change this time. This was not out of expectation but this time, the statement indicated less worries about growth and uncertainty about inflation currently which should moderate as they mentioned indicating the cut by just .25% which was widely expected leaving the door opened for further cuts if it needed. The fed did not surprise the market again. The greenback can find support as the statement is looking less dovish this time than before and it appreciates the inflation upside risks again expecting it to moderate and in line with expectation, they have cut by just .25% which really can signal a close end of this easing cycle which started last September. It looks that there can be a pause next meeting. Cutting by just .25% can send many messages to the market but not a clear direction to the greenback yet. It is the first .25% since the beginning of the easing cycle. The fed may have a wait and see stance to watch the impact of its recent cuts in the coming period. However the housing market is still the main concern with no bottom as it looks. Also there is still a worry about the credit market, the consuming spending is still struggling and so, we have today's cut and as usual, the fed mentioned that it will closely watch the growth and inflation developments and I see that with any improvement of the housing market the greenback can find strong support which can give worries to the current short holders.

The gold should find difficulties if this direction has persisted as it tend to fighting inflation than stimulating growth. Also the current market waiting for weak PMI manufacturing data from EU which can be close to the contracting territory if not in it is weighing on the single currency. . The EU PMI flash indicator has shown a slow down to 50.8 last week to know how far EU is negatively impacted by the US slow down and the strong EURO. Technically the break of 1.551 can open the door for 1.5340 again. Making the dollar selling out of stream currently triggering stop loses versus the single currency too as what's happened to the gold after the break of 861 with inability to break above 882 again versus the greenback forming a new lower high after the one in 895, 905, 927 and the one at 955.

Best wishes

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FX Consultant

Walid Salah El Din

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Published on  Thu, May 1 2008, 14:34 GMT