NEWS / Foreign Exchange

Today's main event will be the FOMC decision

Data released yesterday morning showed that Canadian consumer prices rose 0.7% in February relative to the previous month, and the "core" CPI was up 0.5%. Both outturns were significantly higher than most market participants had expected. The Canadian dollar strengthened in the aftermath of the news on the view that further tightening by the Bank of Canada may now be back in play. Data on retail spending in January are on the docket this morning at 8:30 EDT, and the loonie could strengthen further if the data are stronger than expected. Sterling weakened somewhat this morning, giving up some of its gains from yesterday, following the release of the minutes from the last policy meeting at the Bank of England. Although the Bank left rates unchanged at the meeting, one MP3 member voted for a 25 basis point rate cut. The news that even one MPC member prefers easier policy at present caught the market by surprise.

The main event today will be the FOMC decision, which will be announced around 2:15 this afternoon. As we wrote yesterday, the probability that the Fed cuts rates today is very low. However, investors are keenly interested in the statement that the FOMC will issue at the conclusion of the meeting. Will the FOMC acknowledge that the problems in the mortgage market are affecting the growth outlook? Will it say that inflation is no longer the major risk to the economy? A "dovish" statement would raise hopes that the Fed will eventually cut rates, which likely would weigh on the dollar. On the other hand, a "hawkish" statement could lead to some near-term dollar appreciation.