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The September Euro is trading slightly lower this morning as traders await the Federal Reserve’s latest interest rate decision and assessment of the economy. Traders expect the Fed to leave interest rates unchanged, but it’s their assessment of the economy that is going to move the markets.
If the Fed finds no inflation and says the economy is growing, then traders are going to question whether they are telling the truth. Everyone knows food and oil prices are up, yet the Fed seems to be ignoring this. At the same time, unemployment remains high, nearing 10%.
When Bernanke gives his assessment of the economy, traders are going to listen for his views on whether the Fed is going to battle inflation or try to create jobs. Although Bernanke has stated that high oil prices are “transitory”, he has to be aware of the impact that high oil prices have had and will have on the economy. Because of this, he may state that controlling inflation is still the Fed’s main concern, thereby shoving unemployment to the side.
The dilemma the Fed is facing is controlling inflation while at the same time stimulating employment. Since its latest quantitative easing program is coming to an end on June 30th and no other plan is in the works, the Fed must believe that it has done enough and that it must now wait for the financial stimulus to trickle on through the economy. While deciding to fight inflation seems to be the main concern for central bankers, Bernanke is running the risk of losing control of the economy if it means lower job growth moving forward.
Look for the Dollar to get hit hard if the Fed says the economy is slowing. This means that interest rates are going to remain low at the same time the European Central Bank is hiking rates. Setting the Greek sovereign debt crisis aside until Tuesday’s Greek austerity vote, the favorable interest rate differential is likely to under pin the Euro, sending it through the current resistance zone at 1.4384 to 1.4458.
