Keeping It Steady

Today we'll see if the FOMC decision knocks the EUR/USD out of its 1.29-1.30 range. Market expects them to keep interest rates the same but the focus should be on what inflationary pressures may be out there.

The following are my big 3 inflation factors:

1. We are currently facing a rebound in oil prices with colder weather, however oil prices are still moderate and I wouldn't expect any big hikes without OPEC or oil reserve data.

2. After a big cooldown of the housing market in 2006, this year it appears prices will be moderate.

3. Wage inflation and Democratic party talk of higher minimum wages, this Friday's NFP numbers will also factor in inflation considerations.

IDEA: It would be interesting to chart weather temperatures and study their recent correlation with the markets.

We'll see what hits the wires around the 2pm EST FOMC decision...

US Economic Data On A Role

I forgot to mention today's important release of CPI data in my blog entries this week.

Well, it turns out that CPI came in unchanged after analysts expected a 0.2% increase. At the same time industrial production also increased 0.2% after two months of declines. The FED might as well pat themselves on the back. With the economy resilient, the FED wont be in any rush to lower rates, and will continue to keep an eye on inflation.

This news was more than enough for the USD to continue gaining. And just this week I was fearing an extensive EUR/USD trend, but looks like it stopped in its tracks!

The Federal Reserve, A Very Focused Group

The FED reminded us yesterday that they are tough to budge on monetary policy. They give the impression that there must be very dour economic indicators to start lowering interest rates. This is in contrast to three years ago when they did not hesitate to bring rates to historic lows at 1%. Much credit must be given to them however, as the US recovered nicely from the 9-11 aftermath, and now inflation must be kept in check.

Analysts were hoping for indication of a rate decrease by March. In my opinion, it is a good idea to keep rates steady while the economy holds up as there's always a delay before the affects of rate changes are seen.

The real worry for me however is the currency exchange rate. The USD resisted rallying after two of the most influential reports were neutral to positive for the USD. Especially, the trade deficit coming in at a five year low. And no indication of interest rates lowering anytime soon! (Except a comment about substantial cooling in the housing market) Yet there was minimal move in the EUR/USD . The only reasons I could see are the exceptions to the positive news, mainly that changes to the deficit are mostly oil-related and that things with China did not change much, as imports still increased.

Resistance to these reports indicate to me that the EUR/USD is likely marking a clearly prolonged uptrend. We have two more chances to spark a rally by the way of economic reports, retail sales/consumer demand through the holidays and the next employment report. If there happens to be US positive news and the USD still resists a rally, then I wouldn't be surprised if we started testing all-time EUR/USD highs around 1.36 in early 2007.