The dollar came under modest pressure post FOMC, even though the Fed maintained references to “further policy firming” in its October policy statement, and lone dissident Lacker disagreed with the majority decision to keep rates at 5.25%. Markets had over-extended in anticipation of an unchanged policy statement, which for the most part, was delivered. Despite ongoing references to “elevated” core inflation and the “high level of resource utilisation”, the Fed omitted references to energy and commodity prices as supportive of the inflation outlook. Furthermore, it may be argued that the Fed downgraded their growth assessment by saying that ‘economic growth has slowed’ from a previous “moderating” view. The housing market once again is attributed specific responsibility for part of this cooling.
In fact, the statement rules out a December rate cut and this means that the theme of carry could be prolonged. The delayed start to the Fed’s rate cut cycle probably means a prolonged period of low volatility and an extension to dollar support, which means that upside potential for EUR/USD could be limited for now.
The dollar however slipped further on Thursday, trading past key resistance at $1.2645 to trade at $1.2666.
USD price action the outcome of US economic data remains the key. Today September durable good orders and tomorrow the Q3 GDP data will be released. Strong Boeing orders should puff up the headline number (we expect 4.3%), but ex transport orders will continue coming in weak, slipping by 0.5%.
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Fed keeps rates on hold
The widely expected decision means that rates have been on hold since August, after 18 months of successive rises. Consumer prices fell sharply last month but inflation pressures are still a concern since excluding volatile energy movements, prices remain fairly strong.
The Federal Open Market Committee, which left its rate unchanged for a third month, also ceased describing energy prices as a source of inflation danger.
Fed Chairman Ben Bernanke is betting he and his colleagues will guide the U.S. economy to a so-called soft landing after ending a two-year credit tightening in June. The growth outlook provided by the FOMC in the post- meeting statement was the first since May.
The gamble is that interest rates may not be high enough to nip inflation. The Fed’s preferred price gauge, on a year-over- year basis, has run above the comfort zone of Bernanke and other officials for more than two years. The FOMC forecast in July that inflation in 2007 would remain at least at 2 percent, the upper end of the acceptable range.
The Fed hasn’t been unanimous on their decisions. Richmond Fed President Jeffrey Lacker cast his third straight vote against holding interest rates steady, becoming the first Fed policy maker to dissent at least three consecutive times since 1998.
The FOMC next meets Dec. 12 in
The Fed pronouncement arrived hours after a report showed sales of previously-owned homes fell for a sixth month. The FOMC acknowledged the housing slump has helped cool the economy “over the course of the year.”
Bernanke, who hasn’t commented extensively on the economic outlook since July, said Oct. 4 that the U.S. housing market is in a “substantial correction” that will lop about a percentage point off economic growth in the second half and restrain the expansion next year. The Fed’s assessment of the housing market as “cooling” was unchanged from the prior statement on Sept. 20.
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