FOMC Posts on Forex Blog
FOMC Statement Analysis
Aug 5, 2008
As widely expected, the FOMC held rates steady at 2% today.
The key to today's meeting was the statement released along with the decision.
1. They omitted the phrase in June's statement that indicated risks to growth appear "to have diminished somewhat."
Clearly, they are reacting to recent turmoil surrounding Fannie Mae, Freddie Mac, and Lehman Brothers. As I suggested earlier this week, the FOMC is chiefly concerned about liquidity, not inflation.
2. Their was only one dissenter, Dallas Reserve President Richard W. Fisher.
Leading up to the meeting, their had been some speculation that Philly Reserve President Charles Plosser would join Mr. Fisher's dissent. I believe we will see the dissent count rise to 2 or 3 in a meeting before the Fed finally does raise rates. As such, we are at least 2 meetings away from Fed rate hikes.
However, readers should remember that Frederic Mishkin will be stepping down at the end of this month. It will be interesting to see how the dynamic of the Board plays out as Elizabeth Duke essentially replaces the departing Governor.
3. The committee stated "the Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain."
That is pretty clear. Like many other central banks, the FOMC expects a slowdown in the economy to reduce inflation risks, without an increase in rates. However, the geopolitical concerns behind recent oil pricing makes this expectation uncertain.
So how does the US Dollar perform for the remainder of the week?
I think many traders had already bought into the notion the Fed was to be dovish today, and were thus not disappointed.
Across the Atlantic, news continues to sour for the UK and Euro-zone.
Today, the Nationwide survey of UK consumer confidence fell 11 points to 51. Year over year, that is a 46% decline in confidence, the steepest drop in the history of the report. And, industrial output fell to an annual rate of -1.6. In the Euro-zone, retail sales hit -3.1% today, and PMI slipped further into contraction at 48.3 for July.
For Thursday, Trichet and the ECB are unlikely to make hawkish statements. They are more likely to take a page from the FOMC and warn of downside risks with the expectation inflation will soften over the next few quarters on a weakening economy.
Their is a growing chance the Bank of England will signal a rate cut in their statement.
Given that forex markets have been dealing with a weak American economy for several months, the rapid slowdown across Europe and other parts of the world will probably play a bigger factor in trading action over the next few weeks.
Bank of England, European Central Bank, inflation, interest rates, FOMC, USD
Forex Preview August 3 - August 8
Aug 3, 2008
The core theme of the week will be rate decisions from 4 central banks and attached commentary.
Australia and US bank rates are declared on Tuesday.
On Thursday, banks in Great Britain and the Eurozone announce rate decisions.
All 4 banks are expected to remain on hold. The real market movement will come from associated statements
- The Reserve Bank of Australia (RBA) is apt to remain confident in economic growth and focus on inflationary concerns.
- the US FOMC is likely to focus on a struggling economy with inflation a secondary concern that can be dealt with later
- The Bank of England will presumably highlight a faltering economy, indicating rate cuts may be needed sooner rather than later. If their is one bank that surprises with rate movement this week, the BOE will be it with a rate cut.
- The ECB can be a wild card. Inflation remains double their mandate target. Yet, signs of a Eurozone slowdown are spreading like wildfire. With oil pulling back, their is reason to believe Trichet is going to stress a wait and see approach. However, hawkish comments on inflationary concerns remain a possibility.
Aside from the central bank action, markets are also likely to move on unemployment reports out of New Zealand on Wednesday, and Switzerland, Canada on Friday. The New Zealand report is the only significant data coming out on Wednesday, and as such may gain unusual attention.
Three other events to watch for are:
- the US PCE on Monday (I think their is potential for upside surprise).
- Eurozone Retail Sales and US ISM Services ahead of the FOMC rate decision on Tuesday
Sunday August 3
9:30pm Australia House Price Index (expect -1.3% QoQ, 8% YoY)
11pm New Zealand Commodity Price Index
Monday August 4
5am Eurozone PPI (expect 0.8% MoM, 7.9% YoY)
8:30am United States Personal Consumption Expenditure (expect 0.4% MoM, 2.2% YoY)
Tuesday August 5
12:30am Reserve Bank of Australia Rate Decision (expect hold at 7.25%)
4:30am Great Britain Industrial Production (expect 01% MoM, -1.2% YoY)
5am Eurozone Retail Sales (expect -0.6% MoM, -1.3% YoY)
10am ISM Services (expect 51.0 from 48.2, signaling growth)
2:15pm United States Fed Rate Decision (expect hold at 2%)
7pm Great Britain Consumer Confidence
Wednesday August 6
10:35am United States Crude Inventories
6:45pm New Zealand Employment Report (expect 0.2% QoQ, -0.6% YoY)
6:45pm New Zealand Unemployment Rate (expect 3.8%)
Thursday August 7
2am German Trade Balance (expect €15.5 billion)
2:45am French Trade Balance (expect €-4.6 billion)
7am Great Britain Rate Decision (expect hold at 5%)
7:45am European Central Bank Rate Decision
8:30am ECB President Trichet Press Conference
10am US Pending Home Sales (expect -1.3%)
Friday August 8
1:45am Switzerland Unemployment Rate (expect 2.3%)
4am Italy GDP (expect 0.0% QoQ, 0.3% YoY)
7am Canada Unemployment Rate (expect 6.2%)
Bank of England, ECB, European Central Bank, BOE, jobs report, RBA, upcoming reports, Fed, FOMC
Dissecting Fed Commentary
Jun 25, 2008
As expected, the FOMC held rates at 2% today. Also as expected, the real focus of traders was Fed commentary.
Four things stand out in the FOMC statement
1. Analysts are sensing they key comment is:
"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."
But is it really a significant comment? While upgrading inflation risks over the previous statement, it doesn't say that inflation concerns are greater than growth. It merely says that growth trends are still downward, while inflation is trending upward.
2. Commodity prices have entered the first paragraph
The April 30th statement did not mention commodity prices until the end of the 2nd paragraph. This statement specifically warns in the first paragraph that energy prices are a risk to recovery for the next few quarters.
3. The time period for battling inflation has changed.
The real key may have been the change in time periods. In April, the Fed stated:
"The Committee expects inflation to moderate in coming quarters"
Today, the Fed specifically "expects inflation to moderate later this year and next year" (emphasis added).
No doubt this is a recognition of the recent surge in energy and the likely impact of Midwest flooding.
4. The outlying votes have changed.
In the April meeting, Richard W. Fisher and Charles I. Plosser voted to hold firm. In this meeting, Richard Fisher voted to hike 25bps. With Mishkin leaving after the August meeting, inflation hawks may start to out number the growth doves.
The next FOMC statement will be released August 5th.
Markets remained largely muted to the Fed comments. Expect the EURUSD to edge towards 1.58 resistance before the next ECB meeting.
The Full FOMC Statement
June 25, 2008
Key changes underlined
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
inflation, interest rates, oil, FOMC
The Calm Before the USD Storm?
Jun 24, 2008
Bring back Fed Speak.
The Fed will have to craft tomorrow's statement very carefully. Perhaps some good ole' Greenspan ambiguity would be best.
A spat of negative news today confirmed the US economy is facing difficult times. The Case-Shiller index showed a whopping 15.3% annual decline in home prices. The OFHEO report, which tracks mortgages backed by Freddie Mac and Fannie Mae, showed an annual drop of 4.6%. The Richmond Fed Survey dropped to a low of 4.5 And consumer confidence fell far more than expected, to a reading of 50.4 (vs expected 56.5).
Yet the dollar didn't fall of the face of the earth.
Instead, it remained within a fairly narrow range against the Euro, Pound, and Yen. Evidently, traders feel the Fed is turning hawkish.
Aside from a month of hawkish commentary, what fundamentals can rationalize a strong statement out of the Fed?
1. Uptick in Q1 GDP
I can't stress this one enough. Q1 GDP is expected to be revised up to 1.2% later this week. From an initial reading of 0.6% (later revised 0.9%), that is fantastic.
2. The ARM Conversion Wave
Years ago, the Economist put out a great article discussing the housing bubble pre-burst. In it, they included a graph detailing the ARM conversion wave. The wave had a considerable upswing in Spring 2007 (start of credit crisis), another bump Spring 2008, and a final massive bump in 2010. That suggests that housing will see at least a temporary reprieve for the next 18 months.
3. FDI Outflows are Dropping, Inflows are Picking Up
The OECD today reported that foreign outflows have dropped sharply among member nations. Outflows are now expected to come in at $1.14 trillion, down 37% from the $1.82 trillion in 2007. Indeed, lower than the $1.21 trillion in 2006.
And last week, the TIC showed a sharp increase of inflows of $115 billion vs expected $63.3 billion.
4. Durable Goods Orders
The last 2 reports have beat expectations. The latest report will come out almost 2 hours before the Fed statement. Another surprise (especially excluding autos) is a sure sign of US resiliency.
5. Politicians are Dragging Us Down
It is not a great stretch to suggest political speeches are helping to drag down consumer sentiment.
The Fed is charged with remaining out of politics. As such, they should be expected to ignore the constant down talking of the US economy that is coming out of the politicos.
6. The Greenspan Tarnishment
Former Fed Chairman has taken a lot of heat for leaving rates too low for too long. Bernanke must be conscious of this perception. He must show this Fed will not repeat the mistakes of the past.
Expect the Fed to leave rates unchanged with commentary highly suggestive of rate hikes in the near future.
GDP, housing, Bernanke, durable goods, Fed, FOMC, USD
Make No Mistake, ECB is Hiking 25bps
Jun 23, 2008
He raises rates. He raises not. He raises rates...
The double negative that hit the Euro this morning has fx traders changing their minds like a school yard kid debating their latest crush.
Make no mistake, the ECB is going to raise rates by 25bps July 3rd.
Why?
1. Trichet will not risk the credibility of the ECB.
2. ECB Governing Council member Nout Wellink said it himself last week. Traders are focusing on every little detail and ignoring midterm trends.
3. Euro-zone CPI comes out June 30. It is unlikely that number will dip month-over-month or year-over-year. With that report only 3 days before the ECB meeting, focus will remain on inflation.
4. Quietly, economists are fearing a housing crisis that spreads across the Eurozone. The ECB needs room to act should such an event occur.
While I am on this subject. I want to remind Forex traders, do NOT underestimate the FOMC! With Q1 GDP likely to be revised up to 1.2% on Thursday (from an original 0.6% and revised 0.9%), the Fed has plenty of room to act hawkish.
ECB, CPI, Trichet, rate hike, FOMC
EURUSD Headed Higher?
Jun 21, 2008
A host of factors indicate the EURUSD will head higher this week and test 1.5800 resistance. But beware, the European Service PMI (June 23) and the FOMC meeting (June 25) may hold down advances.
With Euro-zone inflation hitting 8 year highs a steady stream of ECB comments came out all but guaranteeing an ECB rate hike July 3rd. On Friday, President Jean-Claude Trichet reaffirmed comments from earlier this month, stating "I have no message that would retract what I said"
This was further backed by comments from ECB executive board member Juergen Stark, who stated on Friday "The current inflation rate in the Euro-zone...is unacceptably high...In this environment, the firm anchoring of inflation expectations to conform to price stability is absolute priority"
ECB member Bini Smagh joined in the chorus, commenting that if "inflation is left to creep up, the cost of bringing it down later will be even higher."
Technical analysis confirms the fundamental factors. THE EURUSD has;
- set a new 3 Day high Friday
- crossed the 20 day moving average
- is kissing the 50 day moving average
However 2 events could drag the EURUSD down.
1. On Friday at 4am est Euro-zone service PMI will be released. Consensus is for a slight easing from 50.6 to 50.5 (like the US report, any number above 50 signals growth). Cash thinks this data may surprise to the downside. This view is based on the ZEW report last week, Axel Weber's comments earlier this month that Germany will not see the normal spring bump, and higher than expected inflation.
Of course, Chuck may be dead wrong based on on French wage increases (up 1.1%) and the turn around in Italian industrial orders up 12.8% YoY
2. The FOMC may shock us all.
The ECB has talked of a rate hike and seems certain to follow through. The Fed has talked tough for several weeks now, and may be forced to act. While many are expecting the first rate increase to come in September, Bernanke has used unusual timing to his advantage over the last year. A Fed hike this meeting in unlikely, but don't be shocked to see a hike on the discount window. At the very least, the FOMC statement should include some rather hawkish tones.
technical analysis, EUR, FOMC, USD
