LONDON (AFX) - The dollar and the euro were barely changed in early trade with most investors sidelined ahead of an expected rate cut by the U.S. Federal Reserve's open market committee this evening, dealers said.
"Ahead of the FOMC announcement, activity in forex markets should be light," WestLB economists said in a research note. Dealers said yesterday's weak U.S. industrial production figures for April pointed to a 50 basis point cut, bringing the federal funds rate down to 4.0 pct and boosting the dollar.
"The announcement should confirm the market's confidence that the Fed responds appropriately to the economic fundamentals and therefore should give slight support to the dollar," WestLB economists said. 4cast currency strategist Chris Furness agreed market participants had discounted a 50 basis point cut following yesterday's U.S. data. Dealers said the loss in European Central Bank after its surprise rate cut last week continued to weigh on the euro.
They said a 50 basis point rate cut in the U.S. would further weaken the single currency, which has come under pressure following the unconvincing win by controversial media tycoon Silvio Berlusconi's centre-right coalition in the Italian elections on Sunday.
"In the case of the Italian elections, the focus will be on Berlusconi's election promise to reduce the tax burden by 35 bln eur or 3.0 pct of gross domestic product at a time when economic growth is slowing," WestLB economists said.
"Any significant rise in Italy's fiscal deficit would inevitably weigh on the euro," they said.
In the UK, sterling tracked the euro lower ahead of figures expected to show a modest decline in inflation for April.