Printer Friendly

eMail Article

December 14, 2005

Fed Opens Door for a January Pause
by Ashraf Laidi

In its 13^th interest rate hike of the present tightening cycle, the Federal Open Market Committee made the much-anticipated change in its accompanying policy statement by dropping a key reference to the strong elements of the economy ("robust underlying growth in productivity...ongoing support to economic growth"), and substituting the 19-month old "measured" reference for the pace of its policy tightening with a vague phrase that makes a January pause plausible.

Indeed, the Fed allowed room to hedge itself for further rate hikes if the need arose by referring to: "... possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures". But the Fed did signal that any future tightening can no longer assumed to follow automatic and is only a function of the discretion of the Fed, which is dependent on the upcoming data: "some further measured policy firming is likely to be needed"

We reiterate; the door does remain open for further rate hikes. But what is different this time is the lack of conviction by the Fed for further rate hikes and the removal of positive language, which does not make a January rate hike a 100% certainty as was the case in each of the past 13 meetings. In other words, the language was changed in a way that increases the UN certainty going into the next meetings, unlike was the case in previous meetings.

We deem a 60% chance for a January 25-bp rate hike to 4.50%, which is to be followed by a rate cut in Q4, bringing down the Fed funds rate back to 4.25% by end of 2006.

As expected, the dollar is falling across the board, further breaching 3-month trend line support against the euro and the pound, while breaching below the 120 level against the yen and hitting fresh 13-year lows against the Canadian dollar. We did indicate that any change in the statement should be dollar negative as was the case after the release of the Nov 22 minutes, when the EURUSD gained as more than a full cent and the yen pushed up over 70 pips. Carry trade enthusiasts are eyeing any change in signals from the Fed that would add some finality to the accumulation of the dollar's yield luster.

Said differently, when looking at the FOMC statement, we always saw an ensuing rate hike. Today's altered language makes way for the possibility of a rate hike as well as for a pause.

Just like last Dec 04 / Jan 05?

The unfolding situation in the dollar, the Fed and the European Central Bank is a near mirror image of that of late last year/beginning of this year. Today, we have a weakening dollar as a result of the Federal Reserve hinting at the end of its 18-month tightening campaign, and an ECB that could deliver more rate hikes than was previously expected--depending on the deterioration of price stability and signs of upside growth prospects. This is the contrary of late Dec 2004-early Jan 2005, when the US dollar was strengthening amid an increasingly hawkish Fed and political (and market) pressure for the ECB to cut interest rates.

December 2005 FX Forecast

Ashraf Laidi
Forexnews.com

Forexnews.com was created in January 1999 and is committed to enhancing public knowledge about the foreign exchange markets. The site offers the latest insights and analysis in currency markets, freely available to traders and researchers alike.

Forexnews.coms unique combination of fundamentals and technicals, along with its pioneering approach to the FX market, gives it the information edge. Forexnews.com is the longest-standing on-line source of credible, timely and accurate information in FX world.

Forexnews.coms staff of analysts has gained recognition from highly placed media sources, both inside and outside of the US. Its analysts are regularly cited in Bloomberg TV, Reuters TV, The Wall Street Journal, Barrons, The Financial Times and Investors Business Daily.

Copyright © 2005-2006 Forexnews.com

Image rendition and html coding Copyright © 2000-2009 SafeHaven.com

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »