FOMC Decision and Statement

This week’s key fundamental release will be Tuesday’s FOMC interest rate meeting. The Federal Reserve is unlikely to offer any hints about raising interest rates and a renewed commitment to ultra-low rates could put the Dollar on the defensive. The possibility that the Fed would raise rates sooner had been a source of support for the greenback but until there is some positive job growth and inflation readings begin to heat up it is unlikely, with other uncertainties in the global market, that the Fed will send signals of tighter monetary policy ahead. However, there may be some further moves to normalize monetary policy as we had seen by the increase in the discount rate. The signal that traders are now looking for is an increase in the rate that the Fed pays for banks to hold their reserves with the Fed and would be one of the first firm moves that higher interest rates are on the way.What is most likely is that the Fed will gently remind the markets that we’re they are in the process of rescinding the emergency measures that were implemented during the height of the crisis, but that low rates are here for the time being.

Until we see some shifting of expectations that rates will remain ultra-low for an “extended period” the Dollar will be negatively correlated with positive fundmantal data as traders will seek out higher yielding and growth-linked currencies such as the Australian and Canadian Dollars.

US Fundamental Data

The week will also include data on inflation, industrial production and regional manufacturing surveys, housing starts as well as the weekly jobless claims.

Inflation readings are expected to be cool, with CPI increasing 0.1% on the month in February and the PPI declining 0.2% following a sharp 1.4% increase. Those readings do not put any pressure on the Fed from a prices standpoints.

Industrial production rose 0.1% in the month of February and the Empire Manufacturing Index posted a 22.9 readings, the 8th straight month of expansion. Those were good signs for manufacturing sector. The Philly Fed index comes out on Thursday.

Housing starts data comes out on Tuesday and is expected to show another decline in the number of new constructions. Housing starts have been “bouncing along the bottom” for well over a year and it will take a stronger overall recovery in the US economy plus a decrease in the number of unemployed for the construction sector to push above the 600K level.

The last important release to keep an eye on is the weekly jobless calims as we have had two consecutive weeks of declining claims after a string of weeks in which cliams were higher than expected. If the downward trend established thorughout most of the past year continues and we fall below the 450K level than we could begin to price in a positive nonfarm payroll number.