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Currency Traders Show Little Fear of Post-FOMC Dollar Rally as Euro Sets Record Heights

Wednesday, 31 October 2007 16:38:43 GMT  |  David Rodriguez, Currency Analyst

The US dollar continued to set record lows ahead of the critical FOMC rate announcement, as currency traders shrugged off surprisingly positive ADP Employment Change and US GDP figures to sell the greenback ahead of the Fed decision. Such strong selling suggests that forex markets expect few positive developments out of the rate announcement, as markets widely predict that the central bank will cut interest rates by 25 basis points and signal further cuts down the road. The dollar subsequently sees little hope for a worthwhile rebound, but it remains critical to watch the outcome of the FOMC statement.

The British Pound once again dominated currency trading market headlines, setting fresh 28-year peaks of $2.0780 through time of writing. Forecasts of stable interest rates out of the UK leave the Sterling at a clear advantage over the downtrodden US dollar, as markets widely expect yields to continue lower in the world’s largest economy. Momentum traders likewise showed little hesitation in pressing the euro to record-highs of $1.4471. The single currency initially stuttered on surprisingly positive US economic data, but it remains clear that the trend remains towards further euro buying. Yet the dollar did manage to eke out gains against the similarly oversold Japanese currency. The greenback bought 115.21 yen at time of reporting—up 0.60 yen from yesterday’s close.

Early-morning ADP Employment change figures took many analysts by surprise and beat consensus forecasts at a whopping 106,000 private payrolls added through October. The number represents nearly twice the median consensus forecast of 58,000 and sheds an unexpectedly positive light on the otherwise dour domestic labor market. Given an overall trend of 30,000 government jobs added per month, such a result predicts a 136,000 gain in Friday’s official Non Farm Payrolls report. Analysts polled by Bloomberg News expect the data to show a much more modest 80k NFP’s gain, and an improved outlook boosts the dollar’s chances through short-term trade. 

The greenback likewise stood to gain on strong revisions to third quarter GDP results, with the Bureau of Economic Analysis reporting that the economy grew at a 3.9 percent annualized rate through the period. The release came in significantly higher than consensus forecasts of a 3.1 percent gain, and the overall assessment on the current state of the economy certainly shifted. Yet downward revisions to the GDP Price Index (0.8 percent versus 2.6 percent previously) suggested that inflation remained tame through the period. Such results only added further fuel to the argument for lower US interest rates through the medium term—a key source of US dollar weakness.

Stock markets posted strong rallies ahead of the later FOMC rate decision, with the Dow Jones Industrial Average adding a solid 0.5 percent to 13,858. Speculators showed little concern ahead of the critical Fed rate decision—implying that they widely expect the Fed to continue to cut interest rates through the medium term. The other two major indices were likewise improved, with the S&P 500 and NASDAQ Composite adding 0.8 percent to 1,543 and 2,840, respectively. 

Treasury yields actually gained on the afternoon, with improved global risk sentiment encouraging investors to shift to more volatile stock market holdings. The short-dated 2-Year note yield added 2 basis points to 3.83 percent, while the 10-year inched 3bp higher to 4.41 percent.

Written by David Rodríguez, Currency Analyst for DailyFX.com

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