Forex Investment and Currency Trading

Market Update
MBA Mortgage Applications (Actual: -9.3%)
Durable Goods Orders (Survey: 0.0%, Actual: 0.0% )
New Home Sales MoM (Survey: -2.7%)
FOMC Rate Decision

USD
The FOMC will announce its policy decision today and market expects the Fed to leave rates unchanged at 2.00%.  The market is also predicting a decision to hold rates, with Fed funds futures contracts pricing in a very slim probability of a rate hike.  Given Chairman Bernanke’s recent expressions concerning inflation, it seems likely that the FOMC will upgrade its concern about prices while downgrading the chances of a future severe contraction in the economy.  Considering that the market has priced in more than two 25bp hikes this year, short-term risk appears to be on the downside for both US yields and USD.  Any dovish tone in the statement and/or a unanimous decision for keeping monetary policy unchanged will likely weigh on both.

EUR/USD

Ahead of the Fed rate decision, EUR sentiment has been boosted following hawkish comments from President Trichet in testimony to the European Parliament.  Trichet echoed previous comments that inflation is likely to remain higher for a longer period than previously anticipated.  However, Trichet struck a more concerned note on wages by stating that wage growth may be stronger than thought.  While the ECB is expected to hike in July and then remain on hold for the rest of the year, these comments raise the risk that the ECB may have to tighten rates further in line with market expectations.  EUR/USD has nudged higher but the move lacks conviction ahead of the Fed meeting.  

GBP/USD

The pound strengthened against the dollar yesterday after United States economic data showed consumer confidence hit a 16 year low. UK stocks rose this morning after Barclays Plc said it would raise 4.5 billion pounds to help shore up capital. GBP is expected to strengthen further against USD today, as banks anticipate that the Fed will keep rates unchanged at 2%.

USD/JPY

The yen is weaker against the dollar this morning; however, movements have been mostly consolidated to the upper 107 yen range as the market awaits the Fed’s rate announcement today.  Weakness can also be attributed to a disappointment in exports, usually a bright spot in Japanese economic data, rising only 1.1% since last month.  JPY will most likely adhere to this range-bound activity this morning prior to the announcement at 2:15 PM.    

AUD/USD

The AUD strengthened this morning on speculation that the Federal Reserve will hold off on interest rate hikes, enabling the country to sustain its yield advantage. AUD rose to a two-week high against the dollar after reports yesterday showed U.S. consumer confidence at a 16-year low and affirmed the weaknesses in the U.S. housing sector.

NZD/USD

Despite government reports due on the 27th that are anticipated to show a 0.3 economic contraction in the 1Q of ’08, the kiwi dollar gained against the dollar this morning due to expectations that the Fed will resist an increase in interest rates. The country’s benchmark rate stands at 8.25%, with a 28% chance that the Reserve Bank of New Zealand will cut rates by a quarter percentage point next month.

USD/CAD

The Canadian dollar strengthened the most in a week yesterday upon news that US consumer confidence fell to the lowest it’s been in 16 years.  So far today, CAD has been mostly range-bound, which will most likely continue up until the rate announcement this afternoon.  Upon the rate announcement, the risk of any dovish undertones to the Fed statement will most likely lead to a lower USD/CAD.