The FOMC keeps calm while the capital markets are shattered

May 01, 7:20 am
Capital Markets

The recent developments in capital markets captured the perception of investors over the most boiling problems. The EURUSD ran above the 1.1200 resistance level as the single European currency received the vote of confidence on the situation in Greece. The Euro at the high of the last two months does not mean that everyone is relaxed, but the power of the last moment solution, which is suggesting investors what they want to hear, is helping the Euro catch up.

Even if on Friday the Eurogroup leader argued that the EU is prepared for any scenario, several rumours circulate in the market, including that of a controlled default, in which case Greece remains in the Euro area. In the short term, the Euro may gain momentum, while the capital market will continue to take over the shocks (DAX has been recently trading in the 11370 area).

The American dollar weakened considerably because of the deteriorated business sentiment. The weak macroeconomic indicators from the first quarter of the year materialized in a GDP which was reported down to 0.2%. The Committee decided to maintain the interest rate (as expected) and remained optimistic about the future evolution of the economy, but could wait more in order to start normalize the monetary policy. The descending trend for the dollar is still pleasing exporters, while a possible interest rate hike postponed for later in the autumn could represent the basis of this negative tendency.

The New Zeeland dollar appreciated as the American dollar decreased, but the recent RBNZ Rate Statement, after announcing the 3.5% level of the interest rate, brought to discussion a possible lower rate if demand weakens. The dovish announcement could trigger, sooner or later, a negative tendency over the price action of NZDUSD.

The BOJ Outlook Report revealed that the economy is expected to grow above potential in 2015 and 2016, while the consumer inflation is likely to reach 2% around the first half of 2016. Normally there would be no need to ease policy further, but on the short term the mistrust of investors was betrayed by the weakening yen and USDJPY rose to the 119.90 area. In the medium term, the descending trend remains the basic scenario.

The oil markets are due for more interesting action as prices were encouraged to appreciate by the weak dollar and the decline in the American oil inventories. Prices are testing the last 4 months highs and investors could further enjoy the rally until the market remembers about the disappointing U.S. economic growth in the first quarter, together with Asia region, and about the Organization of the Petroleum Exporting Countries which has no intention of slowing the output.

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