Archived IMT (2011.01.26)

Markets go into this evenings FOMC with the expectation of an upgrade in the Feds language while keeping the $600 bln asset purchase program intact until June. This combination of improved outlook and sustainable liquidity injection has contributed to maintaining the relentless rally in US equities. There is talk that the Fed may signal a bottom in disinflationary pressures after the headline version of personal consumer expenditure (its preferred inflation gauge) edged up 0.1% m/m following 4 straight readings of 0.0%. Yet, as long as the more important annual core PCE remains near its all time lows of 0.8%, there is no risk of any hawkish directive any time soon. Despite the introduction of 4 new members to the 2011 FOMC line-up (Plosser, Fisher, Evans and Kocherlakota), only Plosser may be expected to dissent against prolonging QE2 but not in Q1. EXPECT A CHOPPY SESSION ahead of the decision but with the risk of a fresh run-up in EURUSD testing 1.3740s. I STILL SEE BOTH Dow-30 and S&P500 ending the week lower, with as risk-seeking currencies unable to garner gains. AUDUSD is one example (failing to hold at parity before retreating to 0.9900s.