by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Fed left interest rates on hold at 5.25% and, in the statement accompanying the decision, the Fed stated that core inflation had improved modestly. Members stated that the predominant risk was still that inflation does not moderate as expected. The Fed was generally optimistic over growth despite the on-going adjustment in the housing sector with an upgrading of the assessment compared with the previous meeting. The Fed should be content to leave rates on hold in the short term and reduced expectations of a rate cut will provide some near-term dollar support.
US first-quarter GDP was revised marginally to 0.7% from 0.6% while jobless claims fell to 313,000 in the latest week. There was a higher than expected GDP price deflator for the quarter. The PCE core inflation indicator will be watched closely on Friday and a dip in the annual rate to below 2.0% would provide some relief over inflation.
German unemployment fell 32,000 in May, reasserting the downward trend seen over the past few months, while the Euro-zone money supply data was strong with a 10.7% increase in the year to May. The data will help maintain a tightening bias within the ECB and underpin the Euro.
The yen weakened to lows around 123.30 against the dollar on Thursday as there was a recovery in risk appetite following a rally on Wall Street. The yen will remain under pressure if risk tolerances remain higher, but sentiment will remain vulnerable to a rapid reversal.
The latest industrial production data was weaker than expected with a 0.4% drop in May, maintaining the recent disappointing industrial data. There will, therefore, be some concerns over weakness in the Monday Tankan report. The consumer inflation data will be watched very closely on Friday as the inflation data will have an important impact on interest rate expectations. A strong figure would revive expectations of a 0.5% interest rate increase in August.
The latest capital account data recorded a net inflow of funds into Japan. There has also been evidence that investment trusts are curbing fresh investment into high-yield overseas bonds. There is the potential for further lobbying by the Finance Ministry to curb speculative flows overseas, especially in view of new international finance official Shinohara appointed earlier this week.
Sterling pushed to highs around 2.0040 against the dollar and held above the 2.00 level in US trading. The UK currency also held firm against the Euro.
There was a mixed set of inflation remarks by Bank of England MPC members in parliamentary testimony to parliament on Thursday. The members who had voted for an interest rate increase last month continued to voice their concerns over the inflation outlook which suggests that they will again vote for an increase in July.
Other members were more relaxed over the inflation outlook and are likely to vote for unchanged rates. The net evidence suggests a narrow majority in favour of a hike next week, but the vote should be split.
The latest Nationwide house-prices survey recorded a 1.1% increase for May which pushed the annual increase to 11.1% from 10.3%. Expectations of an increase in rates next week will provide short-term Sterling support.
The Swiss currency pushed to 1.2275 against the dollar on Tuesday, but failed to hold the gains and weakened back to 1.2320 after the Fed interest rate decision.
National Bank Chairman Roth continued to warn that the inflation outlook had deteriorated while the economy was performing strongly. Roth also stated that the bank would need to tighten monetary policy further if franc weakness undermined the impact of high interest rates.
The remarks will maintain some speculation over a 0.5% interest rate increase in September and the possibility of an inter-meeting rate increase which will underpin the franc.
The Australian dollar recovered back to 0.8420 against the dollar in local trading on Thursday. Stock market recoveries eased the immediate fears over rising risk aversion and a reduction of capital flows into high-yield currencies.
Global trends will remain dominant in the short term ahead of the domestic data next week and any further gains in global stock prices would tend to support the Australian dollar. The Australian currency pushed to 0.8465 against the dollar in US trading.
The underlying risks, however, are liable to remain higher with greater caution over Japanese flows into high-yield currencies.