Friday, September 08, 2006

All Quiet Waiting for the FED

EUR/USD 1.2716 Hi 1.2741 Low 1.2694
USD/JPY 116.38 Hi 116.55 Low 116.10
AUD/USD 0.7579 Hi 0.7629 Low 0.7561
EUR/JPY 148.02 Hi 148.38 Low 147.55

Interest rates, interest rates, interest rates. And is the FED really done ? Yellen increased market uncertainty yesterday by pointing out that the FED is in PAUSE mode, which means PAUSE and reassess. Her current assessment of economic conditions remained benign. The FED view appears to be that Cost pressures will be absorbed by companies because "markups remain very high". The FED expects Company Profits to take a hit and second-round inflationary pressures (which are the focus of the ECB) to be negligible. She noted that inflation remains high but should unwind as economic growth slows. But the fact that she did not rule out further rate hikes scared the market and encouraged EUR/USD bulls. A bit.

Next week the market will get to see just how high inflation is in the States and Europe. Inflation has yet to see any real falls in the States - despite all the dovish comments from FED officials - and has been trending up together with Capacity Utilisation for the past few years. Unless economic activity has really started to tank in the States, there is little reason to expect to see a sharp fall in underlying inflationary pressures any time soon.

Although the FED does not want to appear irresponsible in its response to inflation, the overall tone of policy statements and the emphasis on the slowing economic outlook suggests that the PAUSE is likely to continue into the end of the year.

Still, for now the EUR/USD bears have not given up. Although the ECB has clearly not finished tightening and despite the fact that growth in the EURO ZONE remains relatively strong, the mild EUR/USD retracement seen yesterday on the back of EUR/JPY selling has given hope to the die-hard USD bulls. EUR/USD is expected to hold above 1.2700 for the time being. With EUR/JPY under pressure, the focus of the USD bear trend is back on the USD/JPY. The BoJ met and held rates steady at its meeting yesterday, which was expected. Rhetoric out of Japan is still mildly hawkish and the Japanese economy, while expected to suffer from a U.S. slow down, is not in as much trouble as the U.S. economy. The longer term USD down trend is not over.

For today, with little in the way of new data to be release, range trading is expected to be the order of the day.

OIL 67.11
GOLD 623.00

GOLD took a hit yesterday. Volatile market conditions are expected to continue but unless there is a radical change of policy in the United States the shift towards holding GOLD as a reserve is NOT expected to reverse.

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