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...

I Like It When Things Get 'Interest' ing

It's boring when expectations are always met. But it looks like the Japanese don't mind making us jump from our seats. Interest rates decisions are probably the announcements that least digress from market expectations. That's why analysts play such close attention to subtle changes in wording... any hint towards the next rate decision or change in monetary policy.

However, the Bank of Japan gave us some fun yesterday as they decided to keep interest rates the same. The market was expecting another .25 hike to .50 but instead was kept the same for fear of slow economic growth. This might make trading JPY interesting as using it as a carry trade strategy can still be a good idea. In contrast with the European Central Bank who are implementing steady hikes, the BOJ may be very well content with sporadic hikes and lengthy pauses in between. As the interest rate for EUR raises at a speedier clip than BOJ, the EUR/JPY currency pair can make for a very interesting long-term strategy!!

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!

USD shows some life

USD bulls capitalized on today's positive economic data. With an increase in November's retail sales of 1%, the USD gained about 65 pips against the EUR. The pair continued that momentum to place itself at 1.3155 on Thursday afternoon.

It was good to see a pro USD reaction as it seemed that the EUR/USD was ready to take off.

We will see what the next catalyst is but I don't expect much movement beyond the 1.31-1.32 range.

read more at dailyfx, Retail Sales..

-Jose M.

Please feel free to leave your comments, enhancements to this blog will follow...

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.

FED decides whether to change interest rates

As the FED decides what to do with its monetary policy, it seems that the market has priced in that they will keep rates the same.

However, it seems like the likelihood of taking a new stance in monetary policy is the highest in a long time. Although most agree that rates will be unchanged for now, there seems to be a high level of uncertainty of what future policy will be. A moderate 3rd quarter GDP seemed to have eased some fears as the economy wasn't suffering as bad as some analysts thought. This will most like decrease pressure from the FEDs and they will be willing to leave rates unchanged for some time longer before they start descending.

There could be some interesting reactions depending on what comes out of this afternoon's report.