Dollar Holds the Bid in Wake of FOMC

In short, as we suspected, the Fed reaffirmed its hawkish posture, dismissing the weak Q4 results as a one off event. The tone of the release led many traders to conclude that 5.25% rates were a strong possibility and the dollar rallied as a result.

But 5.25% won't be a reality until June at best and three months makes a lifetime in the FX markets these days and the Fed clearly remains data dependent. As for consideration of one off events the key data point for the market will be next month's housing sales data. Was the steep drop in new home sales just a pause or the start of a turn to the downside?

Still many a dollar bear has gone bankrupt underestimating the ability of the US consumer to spend. To that end this Friday's Personal Income and Personal Spending reports will be crucial to gauging the true strength of US demand.

If the data moderates more that expected, all talk of 5.25% money may go out the window as traders will begin to fear a cyclical slowdown. If on the other hand the news shows a strong gain in both measures then the Fed's optimism will be confirmed and dollar bulls may be able to push the pair below the 1.1900 figure.

No such optimism for pound longs however, as today's UK Current Account deficit printed a massive -10.9 Billion GBP gap almost unchanged from the period prior. The market was looking for a considerable improvement to the -6.9 Billion GBP level.

The growth in the Current Account deficit may prevent the BOE from lowering rates anytime in the near future even if UK economic activity slows considerably. As a result such a slowdown may turn into a recession - hardly a pleasant sequence of events to consider and the markets responded to the news by selling sterling to below the 1.7400 figure.

Finally, one note of housekeeping. We will be at the FX expo in Ft. Lauderdale for the rest of the week so MB will be published next on 4/3/06.