Dollar Gained Slightly on FOMC Minutes
The dollar gained slightly following the release of the FOMC minutes for March 20/21. The minutes made it clear that inflation is still a focus of the Fed, reducing bets on a Fed rate cut any time soon. The dollar rose initially but dipped back very quickly. The euro is well supported by the 1.34 level.
The wording of FOMC minutes is more hawkish than what we heard right after the March meeting. Recall that the dollar weakened across the board as the Fed unexpectedly abandoned its bias towards a higher interest rates after last FOMC. According to the minutes released today, the Fed agreed that further policy firming might be needed to foster lower inflation. All participants expressed concerns over inflation. The Fed also mentioned that recent increase in energy prices could raise CPI headline. With regard to persistent market concerns over housing market, the Fed said there is no sign of spillovers from subprime mortgage market to overall market. We expect the Fed will hold rates unchanged in the near term.
The European Central Bank is likely to hold its interest rates unchanged at 3.75% on its monetary policy meeting ended tomorrow morning. ECB chairman Trichet??™s post meeting comments will be the focus of the market. Should he sound hawkish about inflation and signal a rate hike next month, the euro will rally.
EURUSD will face interim resistance at 1.3450, followed by 1.3480 and 1.35. Additional ceilings will emerge at 1.3520, backed by 1.3550. Support starts at 1.34, backed by 1.3380, 1.3350 and 1.3320. Subsequent floors are eyed at 1.33.
Possible Tax Reforms Boosted Sterling
The sterling was boosted by a speculation on UK tax reforms which will encourage domestic companies to bring back foreign profits. Financial Times reported that UK Treasury will allow UK based companies to repatriate overseas profits free of tax. However, the impact on the market seems limited.GBPUSD encounters interim resistance at 1.9750, backed by 1.9780, and 1.98. Subsequent ceilings will emerge at 1.9820, followed by 1.9850 and 1.9880. On the downside, support begins at 1.9720, followed by 1.97 and 1.9670. Additional floors are eyed at 1.9650, backed by 1.96 and 1.9550.
Carry Trade Weighs on Yen
The yen continues to weaken against its major rivals as carry trades prevails. IMF(International Monetary Fund) Chief Economist Simon Johnson said today that the carry trade is not as destabilizing as some people think. With no likelihood of a rate increase in the short term, the yen is expected to fall further versus high yielding currencies.USDJPY encounters interim resistance at 119.50, backed by 119.70 and 120. Subsequent ceilings will emerge at 120.30, followed by 120.50 and 120.80. On the downside, support begins at 119 and 118.70, followed by 118.50. Additional floors are eyed at 118.30, backed by 118 and 117.70.