NEWS / Foreign Exchange

Fed's Inevitable Step Towards Dovishness

Considering the recent data weakness and cooling inflation, It may well be a "slam dunk" that the Fed will make a move towards more dovishness in today's FOMC statement.

We expect the Fed to make subtle changes to the characterization of core inflation without necessarily altering its growth assessment.

On the growth front , the Fed is likely to stick with the growth downgrade already made in the March statement, which removed the phrase ???somewhat firmer economic growth??? and replacing it with ???mixed??? . The last statement also downgraded its housing market assessment by replacing ???tentative signs of stabilization in the housing market??? with: ???adjustment in the housing sector is on going???.

On the inflation front , the Fed may make another subtle change to its core inflation characterization after downgrading it to ???somewhat elevated??? and ???improved modestly??? in the March and January statements respectively, from ???elevated??? in each of the meetings of the tightening campaign starting in June 2004. But we also expect the Fed to maintain that its ???predominant policy concern remains the risk that inflation will fail to moderate as expected???. because a removal of this phrase would have negative implications this may bring about to the dollar and bond yields.

Although the March economic data have shown a softening in growth and core inflation, the Fed may not be able to afford recognizing both dynamics as this would accelerate the sell-off in the dollar, which in turn may become inflationary in the medium term.

In the event that the Fed makes minor changes to its characterization of core inflation without altering its predominant policy concern, the dollar could push higher on the rationale that the Fed is content with its the policy status quo.

We continue to expect a 70-75% chance of a rate cut in June based on our expectations for a renewed sell-off in equities that will act as a catalyst to drying liquidity and exacerbating the ongoing slowdown in housing and consumer demand.

Euro is seen regaining 1.36 after Fed

USDJPY risks remain to downside

Cable's gains capped at $1.9970

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