The minutes from the March 20-21 FOMC meeting are due at 2 p.m. EST.
Revisiting the March 21 FOMC statement
On March 21, the Federal Open Market Committee statement dampened its upbeat January tone on growth, while downgrading its view on housing. The Fed downgraded its assessment on housing by describing the “adjustment …is ongoing,” after the January’s FOMC indicated the improvement as “some tentative signs of stabilization.” The Committee did maintain its vigilance on inflation despite modifying the language regarding additional firming. The statement noted: “Recent readings on core inflation have been somewhat elevated” after indicating in the January statement that readings on core inflation “have improved modestly in recent months, and inflation pressures seem likely to moderate over time.”
What will be today’s reaction to the minutes?
Since the minutes will shed more light on the FOMC’s downgrade in growth and housing, as well as the notable change to the statement of replacing “additional firming,” by “Future policy adjustments,” the market reaction could be dollar negative. As for the Committee’s slight upgrade of inflation vigilance, it is likely to be dominated by the findings on growth and housing. This is especially the case after several CEOs of U.S. housing/building companies have issued cautious assessments ahead, warning that the worst may not be over.
Friday’s stronger than expected March payrolls may have been a temporary upside surprise in a deteriorating U.S. data picture, but the net slowdown in services jobs to 137,000 from 180,000 had dragged the three-month moving average to its lowest level since July 2006. The three-month average of the headline payrolls also fell to an eight-month low.
Yesterday’s remarks from Philadelphia Fed President Charles I. Plosser indicating that the U.S. economy is not as strong as expected two months ago, are a rare admission of mis forecasting by a Fed official. Indeed, Fed Chairman Ben S. Bernanke has repeatedly forecasted the recent moderation in growth, but never explicitly stated that the growth rate has slowed to a lower level than was previously forecasted.
Sterling drops after volatile session on taxes and housing
Sterling soared across the board in late Asian trade into the European session after today’s Financial Times discussed that the UK Treasury could potentially allow British-based companies to repatriate foreign profits tax-free. But the currency began losing ground after a Treasury source said any change to the foreign dividend tax regime would be “revenue neutral.” Sterling later extended its declines after the Daily Telegraph published a story that the Britain’s Financial Services Authority would investigate the UK’s GBP 15 billion sub-prime mortgage market. British policymakers, especially government officials, have grown concerned with the appreciating value of the currency. At a time when the Bank of England (BoE) faces an above target inflation rate, UK policy makers cannot afford additional forces lifting the pound, especially when UK rates are set to surpass their U.S. counterparts and rank second highest in the G-10 nations.
Cable soared by more than a full cent to 1.9815 on the FT article as well as strong Easter retail sales, before pulling back to 1.9770. We expect the pair to find support at 1.9750s before potentially fresh momentum ahead of the 2 p.m. release of the FOMC minutes. The minutes may lift the pair towards the 1.9790s, but renewed selling interest is noted at 1.9820. With the UK Treasury playing down the real impact of the tax story, downside risks are for the pair to retreat towards the 1.9710.
Euro may rebound on FOMC minutes
The Euro’s pullback from its latest two-year high 1.3454 could be limited ahead of today’s FOMC minutes. Market cautiousness ahead of Thursday’s European Central Bank (ECB) press conference will also support the currency as ECB president Trichet is likely to signal a May rate hike with the use of the word “vigilance” in describing the bank’s anti-inflation vigilance. Technicals point to an extended decline towards 1.3405. A rebound is ripe towards the 1.3440s on a knee-jerk reaction to more the detailed minutes explaining the FOMC’s downgrade on growth and housing. We continue to see daily resistance at 1.3460, but protectionist rhetoric ahead of G-7 meeting may feed renewed momentum to 1.3480s
USD/JPY bullishness turns vulnerable
USD/JPY continues to be the only shoe in the dollar pairs yet to fall, reflecting a combination of escalating risk appetite fuelling commodities and equities, and the Bank of Japan’s ongoing discomfort with deflation. With the yen focus out of the way ahead of the upcoming G-7 meeting, the prospects for short-term gains remain possible, but the onset of slowing U.S. growth continues to shadow the U.S. dollar. Interim resistance stands at 119.30, followed by key barrier at 119.50, which is the 61.8% retracement of the 122.08-115.14 decline resistance. Support stands at 119 and 118.70.
USD/CAD hits fresh four-month lows, tests 200-day MA
USD/CAD breaks below the 1.147 support, extending losses towards the 1.1450, which is the 200-day moving average (technical level not breached since last November) and the 50% retracement of the 1.1028-1.1874 rise. Subsequent foundation stands at 1.1430, followed by 1.14. Interim resistance is lowered to 1.1480, with 1.15 acting as subsequent barrier. Watch out for comments from BoC and Government officials regarding CAD strength. Key resistance stands at 1.1530.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220
a.laidi@cmcmarkets.com
