Dollar At A Standstill Ahead of the Fed

[B]Talking Points

• Japanese Yen: IP lower than forecast as slowdown spreads
• Australian Dollar: Labor markets remain strong
• Euro: Retail PMI improves
• British Pound: Mortgage lending
• US Dollar: ADP GDP FOMC all on tap[/B]

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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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]