FOMC Unchanged, USD Holds Gains
by Korman Tam
8/5/2008 3:35:00 PM
The FOMC, as expected, left interest rates unchanged at 2.0% when it announced its decision earlier in the session. The accompanying statement offered a neutral bias, reiterating high uncertainty over the inflation outlook, continued softening in the labor markets and considerable stress on the financial markets. The Fed expects tight credit conditions, the ongoing housing contraction, and elevated energy prices to weigh on economic growth over the coming quarters. Balancing its view on growth, the Fed acknowledged "upside risks to inflation are also of significant concern to the committee".
Although the greenback relinquished some of its overnight gains against the majors following the Fed policy announcement, it remained at 11-month highs against the Canadian dollar around 1.0450. The breaches of key levels recently, particularly 0.95 versus the Aussie, 1.0330 against the Canadian dollar and above 1.05 to the Swissie, mark a shift in sentiment with markets rewarding the greenback on a combination of sharp declines in oil and commodity prices and increasing uncertainty over the growth prospects of overseas economies. The euro's inability to hold above its 1-year ascending trendline and subsequent breach of the 1.55-level paves the way for an imminent test of the 1.5300-1.5350 region, which marks the neckline support for a triple top formation.
US data released this morning included a better than expected non-manufacturing ISM at 49.5 for July and improving from 48.2 a month earlier. This corresponds with softer figures from the Eurozone and UK, which printed at 48.3 and 47.4, respectively. With crude oil extending losses beneath the $120-handle, losing another $2.24 per barrel in the Tuesday session, and economic fundamentals across the Atlantic deteriorating more rapidly than expected, we look for the dollar to extend its gains further in the months ahead amid heightened anticipation for policy easing from the RBA, BoE, and ECB.
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