Daily Forex News

Forex News and Events:

By now the whole world has heard about the Federal Reserve raising the discount rate by 25bp to 0.75% last night. While the Feds official rhetoric claims that it is not signaling any shift in policy or economic outlook, it would be naïve view it in any other way. In his written testimony on Feb. 10th Fed Chairman Bernanke stated the Fed could adjust the discount rate "before long", and this would be an effort to bring a level normalcy to Discount Rate and Fed Spread. So the move shouldnt have been a complete shock. It was very important to the Fed that yesterday’s move was not a shift. The issued statement highlighted that the decision does "not signal any change." And just to hammer the fact home they added that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period". Later, the Fed went on the PR offensive with two Presidents, with Lockhart and Bullard attempting to anchor rate expectations. Fed's Lockhart stated that he "would not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent", while voting member Bullard said the markets expectations of a rate hike this year was “overblow”. Clearly the fact that banks are less needing of low cost emergency funds (usage of the discount window had fallen to pre-Lehman levels) and the Fed is comfortable raising rates is the first step in a long an complex tightening cycle. Did the markets really think the Fed would just start hiking the Fed Fund rate? By the sharp reaction in FX market (EURUSD trading down to 9-month low and USDJPY climbing above 92.00) traders were not fooled by verbal slight of hand. Overall, we are in the (small) camp that the FOMC will look to raise rate at their September 2010 meeting well ahead of the ECB and should keep the USD well supported against the EUR. The sterling continues to get punished as the divergence between words, reports and action (conflicting unanimous vote vs inflation report outlook) have made traders very nervous about the potential path of growth, inflation and the possibility of further asset purchase. In addition, the problems in Greece have also high lightened fiscal imbalances. And economic data released today showed that the volatile January UK Retail Sales fell m/m -1.2% vs. -0.5% exp, 0.5% prior reading. While the deviation was believed to be weather related, it seems like business activity has lost some momentum. For now we would prefer to play the short side of the sterling.