ANALISIS FANDAMENTAL(FA) - FOMC - High Impact !!!

EURUSD

The last three consecutive weekly declines in EURUSD reflected the onslaught of negative data from the Eurozone as well as the sharp decline in energy prices. Despite the euro’s 5-cent decline, the currency remains at the center of its 5-month consolidation zone. There are two main forces that would trigger further euro losses: 1) prolonged Eurozone data weakness coupled with peaking inflation; and: 2) increased chances of a Fed rate hike. None of these has occurred. In fact, the contrary has taken place, as Eurozone CPI edged up to a fresh record high of 4.1% according to the flash July estimates from June’s 4.0%. Fed funds futures have substantially curtailed odds of a September 25-bp hike and of a similar move by year-end. Recall that immediately after the June FOMC announcement, futures had priced as much as a 48% chance of an August rate hike and a 65% chance of a September rate hike. We expect these unrealistic probabilities to continue dwindling for the remainder of year’s meetings. We also stick with our forecast that the Fed will cut rates by 50 bps by year-end. While many market pundits reiterate the notion that the US will beat the Eurozone to a recovery, we remind that the US downside risks are highlighted by a combination of deteriorating macroeconomic dynamics and heightened losses on the banking and credit front. Meanwhile, in the Eurozone, the slowdown is largely limited to cyclical and plain vanilla macroeconomic dynamics such as consumer demand/confidence, employment and manufacturing orders. Despite sub-prime related losses with some European insurers, the problems of homeowners’ negative equity and foreclosures have not caused a drag on demand as the case has shown in the US . Neither the macroeconomic woes nor the ensuing bear market in Eurozone bourses has posed ominous questions for the foreign financing of Eurozone deficit. The foreign exchange implications of these analyses are also enforced by the continued (but gradual) diversification in central bank and sovereign wealth fund currency portfolios, into assets denominated in euro, sterling and East Asian currencies. Market players must be reminded that any semblance of economic improvement on the global arena could eventually be interpreted as fewer obstacles for further ECB tightening. We expect the euro to cement a bottom near $1.5450 before gradually but recovering towards the low 1.5600.

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