Sunday, 27 September 2009

Weekly FX Market Outlook: Eyes on FOMC Rate Decision

Weekly FX Market Outlook: Eyes on FOMC Rate Decision
Federal Open Market Committee is to set interest rate on Tuesday Dec. 16. Estimates show the possibility of a 50 basis points reduction when any reduction will bring the federal funds target rate below 1.00 percent. With interest rate close to zero, speculations rise about using unconventional measures for supporting the economy.

Deflation Looms
Fear of a widespread deflation continues to dominate markets by darkening outlook for corporate’ profits. Central banks around the world have cut their benchmark interest rates in recent months in response to the sharp slowdown in global economic activities.

In the U.S. and some other major economies like the Britain, interest rates are headed to zero and policymakers’ fear is that they may run out of ammunition, especially if the downturn lasts more than expected. Fed’s Chairman Ben S. Bernanke already announced that he may use unconventional measures to inject money into the system.

As another sign of falling prices, CPI report from the U.S. Department of Labor on Tuesday may show that the cost of living fell sharply in November after a 1.0 percent decline in the previous month. The same day, the FOMC will decide on interest rate.

U.S. Industrial / Housing Sectors
Reports from the Federal Reserve on Monday are expected to show continuing weakness in industrial sector. Industrial Production probably fell in November when the Capacity Utilization, a measure of the extent of capital used in the production, is also expected to stay at low levels.

Housing Starts and Building Permits remain at historical low levels, a Tuesday’s report from the Commerce Department may show. While recent data from the U.S. housing market show no sign of improvement, some analysts believe that it may be near to the bottom.

ECB’s Smaghi in Washington
Early estimates for the Purchasing Manages Indexes on Tuesday probably show that the manufacturing and service sectors in Euro-zone continued to shrink in December.

On Thursday, the IFO survey may show that German businesses are still pessimistic about the future; though a similar survey from the ZEW came better than expected last week.

The recession worsen but the European Central Bank members seems to have different views about how to response. ECB has been more aggressive than ever, but some members want to keep the flexibility for the future. ECB’s Bini Smaghi speaks in Washington late on Monday and the Euro could react to any data that show the direction that the ECB is headed.

Bank of England Minutes
Minutes from the Bank of England on Wednesday may show a consensus among policymakers when they decided to cut the bank rate by 100 basis points on Dec 4. Economic data this week could also confirm their concerns.

Monthly jobless claims probably increased by 45,000 in November and unemployment rate reached to 6.0 percent.

Another report on Thursday is expected to show a 0.4 percent decline in retail sales at the same period, showing consumers become more cautious about spending on anticipation of economic difficulties ahead.
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