Expert Analysis of Today's Market

• The dollar showed little reaction after the FOMC kept its benchmark rate at 5.25% and retained focus on inflation risk. The yen's three-day rally fizzled out earlier on Thursday as a rebound in stocks increased risk appetite and prompted investors to borrow the Japanese currency again to fund carry-trades. The dollar block currencies gained in cross-trade. Sterling rose above $2 as UK house prices gain at the fastest pace in six months and hawkish comments from BOE’ members.


• The EUR/USD was little changed on Thursday. The pair is testing resistance from the downward trend around 1.35. If this is broken, the pair will move higher, but we still believe the pair is more likely to fall.

Financial and Economic News and Comments

US & Canada

• The US Federal Reserve has left its main interest rate unchanged at 5.25%, saying it had concerns that inflation may fail to moderate. “The committee's predominant policy concern remains the risk that inflation will fail to moderate as expected,” and said economic growth is “likely to continue to expand at a moderate pace over coming quarters.”


• The government revised first quarter real GDP growth to 0.7% at an annual rate, versus the 0.6% growth rate reported before. Almost all of the upward revision was due to higher net exports than previously estimated as other components were little changed. The revisions were in line with expectations and do not changed our outlook of strong second quarter growth. The GDP price index rose at a 4.2% y/y (previously 4%), the fastest increase since 1991 and the core price index up at a 2.4% rate (previously 2.2%).


• US corporate profits data for Q1 was revised upward with a big upward revision to profits earned from foreign operations plus an upward revision to profits from domestic non-financial firms offsetting a downward revision to earnings by domestic financial firms.


• US initial claims for unemployment insurance dropped 13K to 313K last week and continuing claims declined 27K to 2.49 million. The labor market is strong.

Europe

• In a sign economic growth in the eurozone may slow from the fastest pace in six years, the Bloomberg purchasing managers index declined to 48.2 in June, a five-month low, from 48.4 in May. Sales in the EMU’s large economies Germany, France and Italy all fell.


• Germany's unemployment rate unexpectedly fell to the l to 9.1% in May from 9.2% in April, the lowest level since March 1995, the Federal Labor Agency said. The adjusted number of people out of work fell 37K to 3.82 million.


• UK house prices advanced this month at the fastest pace since December. The average cost of a home rose a stronger-than-expected 1.1% m/m in June to 184,070 pounds ($368,000), according to figures from Nationwide Building Society. The annual pace of house price growth accelerated to 11.1%, the fastest since January 2005.


• Bank of England Governor Mervyn King said risks to UK inflation still lean to the upside "The argument for moving sooner rather than later is precisely to avoid having to engineer a major slowdown." This and similar comments by Bank of England Governor Monetary Policy Committee member Tim Besley indicate BOE is likely to raise interest rates next week.

Asia-Pacific

• Japan's industrial production unexpectedly fell 0.4% m/m (a 0.9% increase was expected) in May, the third consecutive decline and the longest losing streak in almost two years, the Ministry of Economy, Trade and Industry said. Manufacturers anticipate production to rise 1.9% in June from a month earlier and 1.7% in July, the Trade Ministry said.

FX Strategy Update