DAILY FOREX:
Market hopes for growth are ahead of the Fed’s 22nd October 2009
EUR USD (1.4985) Even though the message from the Fed in its
Beige Book was one of stabilisation or growth, some market
commentators labelled it as ‘disappointing’. The problem for them is
that market expectations for growth in the US economy are running far
ahead of those expected by the central bank. We have noted that
many of the forecasters who are calling for several quarters of
significantly above-trend growth are drawing their conclusions from
historical patterns. In short, it would be unprecedented not to see a
strong rebound after such a sharp decline in output. However, such a
heavy reliance on precedence is dangerous, especially as the crisis
has already bought us so many things that were unprecedented. The
reality on the ground in the various Federal Reserve districts is that
consumer spending is weak in the wake of the cash-for-clunkers
programme and mortgage applications are down as the tax credit
comes to a close. As government support programmes expire, activity
seems to roll over. If the pick up is not self-sustaining rate hikes are
justifiably on hold, as Fisher from the Dallas Fed reminded us.
Similarly, if growth is not at least at trend level, it will do nothing to
erode the ranks of the unemployed in the US – something to which the
Fed is also bound to attend.
We still pursue a bullish strategy for the euro and anticipate a climb to
our near-term objective, 1.5125. The downside risk-limit deserves to
be moderately tightened again today, this time to 1.4880.