Rangebound market looking to this evening's FOMC announcement to provide direction. Balance of growth/inflation focus in monetary policy statement is key.

Last four regular FOMC meetings have seen the USD strengthen in the following days.

MAJOR HEADLINES – PREVIOUS SESSION

• US Jun. Consumer Confidence fell to 50.4 vs. 56.0 expected
• US Jun. Richmond Fed Manufacturing Index fell to -12 vs. -5 expected and -3 in May
• US Weekly Consumer Confidence out at -43 vs. -44 the previous week
• Japan May Adjusted Merchandise Trade Balance out at ¥642B vs. ¥475B expected
• Japan May Corporate Service Prices rose 0.6% as expected
• New Zealand Q2 Westpac Consumer Confidence fell to 81.7 vs. 96.5 in Q1
• Japan Jun. Small Business Confidence fell to 40.7 vs. 42.2 in May

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• Sweden Jun. Manufacturing and Consumer Confidence (0715)
• Sweden May Trade Balance (0730)
• UK Jun. CBI Distributive Trades Report (1000)
• Norway Norges Bank Deposit Rate Announcement (1200)
• US May Durable Goods Orders (1230)
• US May New Home Sales (1230)
• US Weekly Crude Oil and Product Inventories (1435)
• US FOMC Rate Decision (1815)
• New Zealand Q1 Current Account Balance (2245)
• Australia May Job Vacancies (0130)
• Japan BoJ Member Nakamura to speak (0130)

Market Comments

US Confidence fell off a cliff in June, with a spectacular drop from 58.1 to 50.4, one of the largest one month drops in recent memory. The confidence reading has only been lower on two occasions in the over 30-history of the survey - once in the months after the first 1970's oil shock/stock market crash/Nixon resignation in late 1974 and once in early 1992 as the country was working its way through the last phases of the recession of that period (the most recent real recession we have seen.) The expectations portion of the index dropped to the lowest reading ever. It will be very interesting to see whether the ardently hoped for second half recovery materializes. If we look at the two times mentioned above, growth recovered strongly in early 1992, while in Q1 1975, GDP registered a whopping -4.7% drop. Of course, the clever army of US statistician/bureaucrats and its outrageously dishonest inflation numbers would prevent such a low reading from ever seeing the light of day in our modern era. As we have said before, the US is already in recession since Q4 of last year if inflation were honestly accounted for. It's a bit curious to see such a divergence between the weekly US confidence numbers of late and the June Conference Board number, so we might expect at least a dead cat bounce in July on the Conference Board number.

The market is obviously watching for the outcome of the FOMC meeting today and the accompanying monetary policy statement. The market is apparently generally long USD, so the knee-jerk surprise side would be a statement that falls on the dovish side of expectations. There has been quite a run-up in expectations for Fed tightening in the year ahead - somewhere in the neighborhood of 100 bps. The 2-year rate is just south of 3% now after trading as low as 1.25% at the depths of the credit crunch in mid-March. The interest rate differential signal for EUR vs. USD doesn't suggest that it is time for the USD to sell-off, but we will have to see if the statement provides a reaction in rates.

Looking elsewhere, we can only see a sea of rangebound and indecisive charts. Some of the JPY crosses continue to eke out new highs, but momentum there is very low. EURJPY has been up challenging not far from the all-time highs and again, we wonder if today's FOMC meeting can provide a pivot for these trades, either accelerating the move higher, or triggering a deep consolidation. The market doesn't seem willing to move lately, but it must commit one way or another soon. New Zealand confidence is also dropping to near record lows and a new look at downside in NZDUSD may be just the thing if the pair looks vulnerable post-FOMC.

Chart: EURUSD
Beware that the recent history of the FOMC meetings suggests that it is very dangerous to go with the initial reaction in the hours after the FOMC rate announcement. The first move of the Fed easing cycle on Sep 18 touched off the entire sequence that took us from 1.3900 to 1.6000, but since the Dec. 11, 2007 meeting, the FOMC decisions - save for the 100 bp cut shocker on Jan. 22 - have seen the USD rally in the days after the meetings, even if the initial reaction may have been one of USD weakening. No pattern holds forever, but this is interesting nonetheless.