Forex Investment and Currency Trading

FT : Officials say market expects too many rate rises. Financial markets are in danger of getting carried away with their expectations for Federal Reserve interest rate increases, some senior Fed officials believe.They do not dispute that the next move in US interest rates is very likely to be up. But they feel the market may be pricing in too much tightening too soon.

WSJ : Fed Mood Tilts Away From Rate Increase. The Federal Reserve is almost certain to leave interest rates unchanged when it meets next week, and it currently doesn’t appear to see a compelling case for raising rates before the fall, unless the inflation outlook deteriorates considerably. Futures markets are betting that the central bank is likely to raise its interest-rate target from its current 2% in August, because of mounting inflation worries. But that may be an overly aggressive wager.

Trading Strategy - Central Banks look to abandoning some of their hawkish talk in the past few weeks in favor of some new dovish language. The USD fell last night after some “leaks” in the FT and the WSJ that implied that the Fed did not want to raise rates from 2%. The EUR rallied and risky assets took a positive spin as the market began to price out rate hikes (As of this morning however, the market is still pricing in about 70bps of a hike from the Fed by year end). There was plenty of USD selling off the back of these article in Asia.  But in London morning, much of the EUR/USD rally was reversed as the ECB’s Smaghi said that 1 ECB hike would be enough to contain inflation and Germany released a rather weak ZEW survey.  Lastly, despite UK inflation that was .1% higher than expected at 3.3% YoY, Mervyn King wrote a fairly dovish letter to the chancellor (market expects unchanged rates for the rest of this year and cuts in 09H1).

Looking at the last 24 hours and the consistent moderation of hawkish central bank rhetoric, equities have responded well in Europe, while interest rate futures are rallying aggressively, pricing out some of the monetary tightening predicted from the last couple of weeks.  Today we have US PPI, IP, and housing starts, so we should see some more volatility today.