Fed keeps rates steady

The FOMC statement provided no surprises, with the Fed pointing out that economic growth had “slowed in the first part of this year” while signalling that its predominant concern was the risk that inflation would fail to moderate as expected. The USD rallied modestly on the back of the release owing to market positioning, but failed to break through $1.3515 key support ahead of the ECB meeting later today, which is widely expected to maintain rates at current levels. The ECB however, is expected to signal a rate hike in June, but the wording of its statement will be combed by market participants for clues as to the next direction in rates after the June meeting.

Prior to the FOMC announcement, a US Congressional joint hearing on currency issues brought little excitement although Senior US Democrats vowed to pass legislation aimed at “China and Japan’s unfair currency practices”, the impact of Democratic fervour on trade policy was mitigated by more conservative rhetoric from US Treasury Secretary Paulson, who held that CNY moves alone will not cut China’s trade surplus and reaffirmed that the yen’s low value stems from deflation, noted BNP Paribas in its daily report.

Sterling remained well supported given market speculation that the BoE could hike by 50bp today. This also explains EUR/GBP’s drop below the 0.6800 level yesterday. But while GBP/USD should retain its medium term uptrend, in the nearterm there is a risk that GBP could face some selling pressure today. First, the market will be disappointed by a 25bp move by the Bank, says BNP Paribas.

Second, UK data has been mixed of late. A survey by Voca reported in the FT signalled a decline in real wages while the BRC retail sales monitor noted a slowing in sales growth. With the market heavily long cable, there is a possibility for a move lower towards strong support at 1.9800.