Fed Forced Back to Easing Mode

Hi Tan, rate cut tuesday is more of a major development than a "surprise". Not a big "surprise" because AFTER FRIDAY's RETAIL SALES, Fed funds futures were already pricing as much as a 30% chance of a Fed cut as early as MONDAY or TUESDAY. If a new announcement regarding Lehman comes out on Sunday or Monday, then that might help markets a bit, (drag down on yen) which may reduce need for easing. That could win the Fed some time, but in my view, the most LIKELY SCENARIOS:

1) 50 bps cut in DISCOUNT RATE CUT this week; OR,

2) 50 bps FED FUNDS cut between September and October meetings.

Stay tuned.

Hi Hamish, the retail sales and PPI numbers were behind the intensification of the dollar decline. Have a look at the Intraday Thoughts right after the news. I mentioned in Wednesday's seminar that the Fed's next move is a rate cut and I sent CMC clients the chart showing a major trend line support in EURUSD at 1.3845. Here's what we said: "The chart below shows interim support stands at $1.3844, which is the 50% retracement of the rise from the 2006 low to the $1.6030 high. This level could also coincide with the $100 barrel mark in oil prices".

GBPUSD unlikely to follow above $1.80 which is HEAD in the Head&Shoulders (see chart sent on Monday).
JPY may come under pressure if Fed cuts rates this week, but overall, USDJPY unlikley to break above 108.50. 105 remains target.