The Federal Reserve on Focus
After some surprisingly upbeat US data including the unemployment falling to 10% from 10.2% and retail Sales rising 1.3% MoM investors moved to reassess the rates expectations in the US. With rate hikes in the US seem closer than before, and economic woes in Greece and Dubai, demand for the Dollar remerged pushing the long battered Greenback higher by around 4% against the Euro and the Sterling. Now that the US economy is showing signs of recovery investors are keen to figure the timeline of the Fed monetary tightening with the Fed rate decision at the centre.
Today at the Fed rate decision interest rates are again expected to be left unchanged at 0.25% with the Fed rhetoric on rates getting special attention. After Producer price index gained 1.8% MoM yesterday a strong gain by all measures and official CPI (core inflation) due today investors are increasingly worried the Fed might need to raise rates sooner than it actually intends to. At the moment as capacity levels still remain low, consumer spending is subdued and credit is tight the Fed is largely expected to outline once against rates will remain low for a prolonged period and keeping inflationary projections tamed. If economic figures will continue to improve the Fed rhetoric could change sooner than expected with rate expectations rising accordingly. This is the main reason for attention on the Fed rate decision. Investors wait for the rhetoric on rates to change.
So what should you look for?
Higher inflation expectations- Although not likely if the Fed will raise inflation expectation this will make monetary tightening closer thus providing strong demand for the Dollar against its peers. A much higher than expected CPI reading today could have just the same effect, spurring bets inflation expectations will bring monetary tightening closer.
Exit from Stimulus- The Fed currently holds around 7% of the total MBS market (mortgage backed securities) to keep mortgage rates low and stabilize the housing market. With the Fed expected to stop its MBS purchases in Q1 2010 investors are waiting for news on when the Fed will start exiting the MBS it holds on its balance sheet. An announcement on that context or an announcement of unwinding any other emergency facilities could lead risk appetite to fold with investors betting on a higher Greenback. However if the Fed will announce an extension to the deadline of MBS purchases this could have the opposite effect on the Dollar with Dollar bids emerging.
Technical Analysis
GBP/USD
Bullish Scenario- Currently the pair is find strong support in the 1.62 level which could provide enough demand for a move towards the 1.64-1.66 area to regain bearish momentum
Target A: 1.637
Target B: 1.659
Bearish Scenario- A daily close below the 1.62 support would move the pair to test lower resistances with a strong momentum
Target A: 1.612
Target B: 1.5750
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