APR 7 FOMC Meeting Minutes (MAR 18) (18:00 GMT; 14:00 EDT)

What Are the Markets Facing?

On Tuesday, Treasuries, the US dollar, and US stock markets may simply trade quietly until the release of the FOMC March meeting minutes at 14:00 EDT. During the last meeting on March 18 the FOMC cut rates by 75bps to 2.25 percent, bringing the grand total of fed fund rate reductions since last September to a whopping 300bps. As a result, it’s rather clear that the instability in the financial markets and the downside risks to growth were of major concern at the time, and a pronounced focus on these issues will lead investors to aggressively price in another round of rate cuts on April 30. Indeed, there is little doubt that sentiment within the FOMC is on the pessimistic side following Federal Reserve Chairman Ben Bernanke’s testimony last week that noted, “It now appears likely that the real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.” On the other hand, according to the monetary policy statement released after the rate decision, two FOMC members - Richard Fisher and Charles Plosser - “preferred less aggressive action at this meeting.” The key to gauging the market’s reaction will likely be in what exactly Fisher and Plosser voted for and said. If their comments suggest that the FOMC is becoming more concerned about the risk of moral hazard and inflation pressures, the markets will continue to price in a mild 25bp cut on April 30.

Bonds – 10-Year Treasury Note Futures

Treasuries remain heavy since backing off from resistance at the 119-12 level, and the contract may ultimately test trendline support at 115-28/30. Upcoming event risk for Treasuries includes the FOMC meeting minutes, and if the release indicates that the Committee will be hesitant to continue cutting rates aggressively, the contract is likely to plummet. On the other hand, a pronounced pessimistic tone on the financial markets could lead Treasuries to rebound toward 119, as futures will quickly shift to price in a 50bp cut on April 30.

FX – EUR/USD

The 20 day SMA continues to remain a strong support level for the EUR/USD. Bullish dollar sentiment tested the current level of 1.5638, before rebounds in European investor confidence and German industrial production crossed the wires and generated a bid tone. The dollar has been receiving support on speculation that the recent stabilizing of the financial markets, evidenced by Lehman Brothers, UBS and now Washington Mutual having the ability to raise cash, will allow the Fed to refrain from further rate cuts. Recent testimony by Chairman Bernanke that the economy will contract in the first half of the year and an 80K decline in NFP’s failed to push the Euro above the 1.58 price level, which may end up proving to be a formative resistance level. The upcoming release of the minutes from the FOMC’s last meeting, where they surprised markets by cutting rates by only 75 points, will be closely scrutinized as traders try to get insight for the next policy meeting. Considering, the recent speculation that the FOMC’s tone has turned hawkish, any language that will support this notion will provide significant support for dollar bulls. Indeed, indications that inflation concerns are becoming a priority or downside risks are dissipating may send the pair lower to test 1.55. Conversely, if there is talk of additional systemic threat to the financial markets or concerns that the current contraction may extend beyond recent expectations then a break above resistance is possible.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average has thus far been able to hold above 12,500, but nevertheless, the long-term trend remains to the downside, and in the near-term, substantial resistance looms above at the 12,700/15 level where we have a 50% fib, the February highs and the 100 SMA. Risk trends will remain the biggest driver of day-to-day price action, but the upcoming release of the FOMC meeting minutes from March could weigh the DJIA toward 12,460/500, as the central bank will likely remain concerned about financial market stability and the credit crunch.

Terri Belkas is a Currency Strategist at FXCM.