By DailyFX – As was expected US markets paid little attention to the sole market moving indicator released Tuesday. Even though consumer confidence hit a… … near four-year high this month, the direct impact tomorrows growth report and Federal Reserve rate decision may have on stocks, debt and currencies is too great to ignore.

Expectations surrounding tomorrows data are clear cut, and this may prove costly
for investors with open positions backing their personal forecasts. For Wednesday,
the fundamental action will start well before capital markets open in the US.
Economists expect the advanced read on fourth quarter GDP will come in at a round
3.0 percent. Even though the official consensus is already earmarking a considerable
acceleration in growth, the masses may be slightly more optimistic on the number. If
traders are already preparing for a better than expected number, it may discount the
actual print. Furthermore, since official exchange trading hours begin a full hour
after the GDP announcement, market participants in both the debt and equities
markets have enough to time to fully digest the data a definite impediment to
momentous moves usually seen right after releases. Later in the day, however,
everyone will have a shot at responding to the FOMC rate decision. Like the GDP
report, the markets are expecting a lot from the event. Most know there is almost no
chance for a shift in the overnight lending rate, but every word from the short
statement that follows the decision could prove market moving. Traders will look for
any hint that the Fed is turning hawkish on the economy, with specific interest
surrounding a mention of a possible bottom in the housing slump. Alternatively, with
all the tension leading into the day, an uneventful pass on both growth and the
Feds part would generate considerable disappointment and open the door for Friday
NFPs.

Bonds – US 10-Year Note Futures

Treasuries have budged little over the past three trading sessions. With the
possibility of a shocking print for GPD and/or a shift in sentiment coming out of
the FOMC statement due tomorrow, few investors will take the gamble of ignoring the
inherent risk. As of Tuesday, the low in T-note futures was clearly stamped at
106-06 from last Fridays low. However, this level has little technical
significance, and a better than expected print in annualize GDP or the recognition
of a possible turn in the housing market from the Fed could easily extend the move.
Conversely, a hearty heaping of disappointment could paint treasuries oversold
and offer a considerably sharper move. Though, if a rally is triggered, a move
higher would likely stop short of the channel top, leveraging a payrolls surprise.

FX – US Dollar Index

The dollar index continues to trade in a relatively tight range, with markets
holding back speculative bets ahead of top-tier economic data. Given the
significance of tomorrows GDP and FOMC news releases, traders are unwilling to
commit to large dollar positions in fear of weaker data prompting sharp retraces in
strength. What positioning remains, however, is tipped towards dollar bullishness.
Fridays Commitment of Traders report shows that USD positioning grew slightly
more upbeat through the most recent sampling period, with traders holding a net
21,969 implied dollar longs. This could run into considerable danger if tomorrows
releases disappoint, however, with the rising November-January trendline just 0.6
percent below todays close. A soft GDP read could instantly prompt a dollar
sell-off, as built up confidence would quickly whither away if growth figures do not
match high expectations. If numbers fall in line, we could easily see an equally
worrisome Greenback test following the afternoons FOMC Rate Decision. Dollar
bulls hope that the trade-weighted DXY will hold above 84.50, confirming a
continuation of strength through the short term.

Equities – S&P 500 Index

Much like the domestic currency, US equities remain at a significant crossroads
ahead of tomorrows economic reports. Recent tests of a rising 3-month trendline
underline waning bullishness on the worlds largest equity markets, with fears of
high interest rates undercutting an otherwise solid outlook on corporate
profitability through 2007. Stocks previously enjoyed significant bids as
speculators wagered that the Federal Open Market Committee would move to cut
interest rates through the coming quarters. With the probability quickly fading,
however, many market commentators have begun calling an end to Wall Streets
4-year bull market. Given interest rate sensitivity, traders will be paying
exceedingly close attention to tomorrows FOMC rate decision and subsequent
commentary leaving risks to the downside if officials become more hawkish in their
outlook for monetary policy.

Regards,

John Kicklighter
Forex Capital Markets
32 Old Slip, 10th Fl
New York, NY 10005
Email: jkicklighter@dailyfx.com

FXCM and its affiliates assume no responsibility for errors, inaccuracies or
omissions in these materials. They do not warrant the accuracy or completeness of
the information, text, graphics, links or other items contained within these
materials. FXCM and its affiliates shall not be liable for any special, indirect,
incidental, or consequential damages, including without limitation losses, lost
revenues, or lost profits that may result from these materials. This email is not a
solicitation to buy or sell currency. All information contained in this e-mail is
strictly confidential and is only intended for use by the recipient. All e-mail sent
to or from this address will be received by the FXCM corporate e-mail system and is
subject to archival and review by someone other than the recipient.