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Saturday, July 01, 2006

FOMC June Meeting Decision and Aftermath

FOMC June Meeting Decision and Aftermath - The Fed raised its fed funds rate by 25 bps to 5.25% on it's last two day meeting ending June 29. A move expected my most analysts but the surprise was the statement issued after the meeting.

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The FED maintained its description of inflation expectations as "remain contained" while the impact of resource utilization and rising energy prices to continue to only "have the potential to sustain inflation pressures".

However, the FED changed the part of the statement regarding economic growth. FOMC gave this assessment of the US economy in it's June 29 statement: indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

In it's May 10 Meeting, regarding economic growth the FED said: "The Committee sees growth as likely to moderate to a more sustainable pace".

Regarding future decisions, the FED said: "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives".

The FED maintained the decision will depend on the data attitude, not giving any clues about it's future moves. This should cause additional activities like we've seen in the past months, the traders interpreting every data release as more significant, and adding more weight to it, which in turn could lead to choppy trading ahead.

You can find the text of the statement here: FOMC June Meeting Statement

Still the statement is dollar negative and dovish. The FED issued a more certain note towards moderating economic activity, while making no upgrade in its inflation vigilance.

The dollar feel against all major currencies as a result of the statement. It lost 130 pips against the euro after the FOMC June Meeting Decision, and closed at 1.2666. Against the pound, the dollar lost 170 pips and closed at 1.8274.

In yesterday's trading we saw the effect of the the decision will depend on the data attitude when the dollar got hammered badly on a set of bad news. The dollar fell for a second day yesterday, losing 124 pips against the euro, and 206 pips against cable. It closed the week at 1.2791 versus the euro, and at 1.8482 against the pound.

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All questions and comments are welcomed as usual. Thanks for reading FOMC June Meeting Decision and Aftermath analysis.


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