Reply #25: dollar watch [View All]

[UpInArms]

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Dollar At A Standstill Ahead of the Fed

http://www.dailyfx.com/story/bio2/Dollar_At_A_Standstill_Ahead_1201688142183.html

Another grinding session of listless trade in Asia and Europe today as markets appear to have come to a standstill ahead of the FOMC rate decision due today at 19:15GMT. The EURUSD has traded in a 20 point range for the past 12 hours as traders square up for the key event risk of the week.

The consensus view is that the Fed will cut 50bp today, but as we point out in Will The Fed Surprise The Markets And Push The Dollar Higher? an argument can be made that the US monetary officials will only lower rates by 25bp this time. In either case, volatility which has been practically absent for the past 2 days, is likely to return once the Fed renders its judgment and the markets make their adjustments.

Although a 50bp cut is expected by the vast majority of market participants, we believe that such a move, which would expand euro rate advantage over the dollar by full 100bp, would prove to be dollar negative. The EURUSD has had tremendous difficulty penetrating the 1.4800 barrier as option activity has kept the euro longs at bay, but should the Fed cut rate by 50bp that price level is likely to fall, especially if the accompanying statement suggests that the Fed will continue to ease for the foreseeable future.

In economic news the Retail PMI numbers out of Europe showed an improvement bouncing back to 48.1 from 46.0 mainly on the strength of French spending. Although the data remains mired below the 50 boom/bust level, it has stopped contracting and as such must provide a dose of relief to European monetary officials who have been accused of keeping policy too restrictive amidst lackluster consumer demand in the region.

Looking ahead to the North American session, the ADP and GDP numbers may provide some short term excitement before the key FOMC announcement later in the day. With consensus view so heavily skewed towards a recession scenario in the US, any positive surprises could provide a boost for the buck, but the true direction of trade in the currency is likely to be determined by the Fed action this afternoon.

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How Much Will the Fed Cut at Its January Meeting: 25bp or 50bp?

http://www.dailyfx.com/story/bio1/How_Much_Will_the_Fed_1201647865015.html

All eyes are locked on the Federal Reserve’s monetary policy decision tomorrow afternoon. The price action of the US dollar has been mixed since the beginning of the week indicating that traders are not ruling out any surprises. Fed fund futures are pricing in a 72 percent chance of a 50bp rate cut and a 28 percent chance of a more conservative 25bp cut. Of the 86 economists polled by Bloomberg, 49 expect a 50bp cut, 23 expect a 25bp cut, while 13 expect rates to be left unchanged (the one remaining economist believes that there will be a 75bp rate cut). DailyFX readers actually actually favor a 25bp rate cut over a 50bp cut and interestingly enough, the votes between 50bp and nothing at all are very close. In other words, the consensus across the markets is not very strong. We believe that the Fed will nod to the markets once again and cut by 50bp. Shortly after the emergency rate cut, there was a decent chance that the Fed could make two back to back 75bp rate cuts. But since then, traders have become far more realistic by realizing that the world has not come to an end and stocks have stabilized. As a result, rate cut expectations have eased significantly. Since the emergency rate cut last week, stocks have rebounded 800 points, durable goods increased strongly in the month of December, gold prices have hit record highs while oil prices regained strength. The housing market still remains vulnerable with house prices as measured by the Case Shiller index falling to the lowest level in 7 years. The choice between a 25bp or 50bp rate cut is really the choice between being “at the curve” or “ahead of it.” By the end of this year, we expect interest rates to come down to at least 2.50 percent, which is 100bp from current levels. The Fed can get half of that easing out of the way on Wednesday and enjoy the benefits of easy monetary policy throughout the second half of the year or they could cut by only 25bp and work for each tenth of a percentage point increase in GDP. Either way, there is a slim chance of the FOMC rate decision being dollar bullish because tomorrow’s rate cut will certainly not be their last. Before the rate decision, there could be some action with the ADP employment change and the advance release of fourth quarter GDP.

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