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Rate Decisions Ahead Could Shift Risk Sentiment After Troubling Week

By , Currency Analyst
03 June 2011 22:04 GMT

After a week of troubling data out of the United States that cast a shadow of doubt about the resiliency of the recovery in the world’s largest economy, with no critical events on the calendar for the United States, the market will turn its collective eye overseas as there are four rate decisions on the calendar for the first full week of June. Growth and inflation are two of the top priorities for central banks around the world, and yet, even in a globalized economy, prices pressures are affecting the four countries that have interest rate decisions very differently. Although the current attitude in the market has shifted toward risk-aversion, commentary following each of the rate decisions could spark hope among traders, sending the various domestic currencies affected by their respective rate decisions higher still against the U.S. Dollar.

  • Reserve Bank of Australia Rate Decision (MAY): June 7 – 04:30 GMT

Price pressures, though contained, are beginning to rise for Australia, which saw first quarter CPI jump 1.6 percent on a quarterly basis, and 3.3 percent on a year-over-year basis. Although the antipodean nation’s gross domestic product fell by 1.2 percent in the first quarter, the Reserve Bank of Australia blamed massive flooding which suppressed coal exports, and thus the decline is only viewed as temporary.

The markets are discounting the possibility of a rate hike, with only a 13.0 percent chance of a 25-basis point rate hike at the meeting next week. Similarly, only 24.0-basis points are priced in the Australian Dollar for the next 12-months. Rhetoric following the meeting will be key, as if inflationary pressures continue to build, there might need to be the need to raise the key rate in the coming months. As such, should commentary following the meeting be hawkish, the Australian Dollar could continue to see an appreciation against the U.S. Dollar.Join a DailyFX analyst for live coverage of event!

  • Euro-zone Gross Domestic Product s.a. (YoY) (1Q P): June 8 – 09:00 GMT

Euro-zone gross domestic product data for the first quarter could disappoint expectations, as continued sovereign debt woes has weighed on many of the smaller Euro-zone nations. Similarly, while there was a rate hike in April, the rates were still lower in the first quarter. The Euro-zone economy was continuing to expand in first quarter, though, with retail sales, industrial production, and manufacturing data all moving to the upside in the first three months of the year. Nonetheless, the components of growth are well-documented before the release of the aggregate number, the price action sparked onto Euro-crosses could be limited.

  • Reserve Bank of New Zealand Rate Decision (MAR): June 8 – 21:00 GMT

Although food prices and producer prices continued to rise in April, according to their most recent data releases, muted concern by Reserve Bank of New Zealand policymakers with rising inflationary pressures in the Pacific Rim’s economy have weighed on the notion of a rate hike. Additionally, housing prices continue to fall, down 1.9 percent in April. Consumer spending has started to move higher again, as evidenced by increased card spending on retail goods in April.

With inflation currently contained within the Reserve Bank of New Zealand’s acceptable medium-term range, markets are doubtful on a 25-basis point hike, with a 0.0 percent chance of a move at their next meeting. Similarly, according to the Overnight Index Swaps, 57.0-basis points have been priced in over the next 12-months. Join a DailyFX analyst for live coverage of event!

  • Bank of England Rate Decision, Asset Purchase Target (MAY): June 9 – 11:00 GMT

The Bank of England is widely expected to keep their key overnight interest rate on hold at 0.50 percent at their meeting on Thursday: according to the Credit Suisse Overnight Index Swaps, there is a near non-existent 1.0 percent chance that the Monetary Policy Committee votes to hike rates now. Also of note: inflation hawk Andrew Sentance ended his tenure this week, and was replaced with a much more moderate policymaker. The OIS shows that markets are pricing in a 31.8-basis pointsover the next 12-months, having fallen significantly over the past few months, despite rising inflationary pressures.

It appears that policymakers are more concerned with restarting the economy rather than tempering inflation – they are unwilling to let a stagflationary state kick in.The Bank of England will be forced to readjust their monetary policy stance towards a more dovish tone in the near-term, and after moderate growth, a more hawkish bias to contain price pressures. This commentary is unlikely at the next meeting on Wednesday.

  • European Central Bank Rate Decision (MAY): June 9 – 11:45 GMT

Growth is expected to have climbed slightly higher the first part of 2011, as noted early. Still, the main concern for the European Central Bank is to keep inflation tethered within its acceptable range, in spite of an interest rate hike at their meeting on April 7. April’s inflation rate was 2.8 percent, as indicated by the year-over-year consumer price index reading. Nonetheless, because it typically takes a few months for the effects of a rate hike to be felt by the broader market, inflation pressures are unlikely to have cooled since the last meeting.

Various European officials have hinted at the possibility of a rate hike at next week’s meeting, and with the news of a Greek bailout on the table, it is possible that President Jean-Claude Trichet moves to raise rates once more. Still, his rhetoric at the press conference following the meeting is the most important event on the day, as his commentary will clue traders into whether or not there is a rate hike in the future. Join a DailyFX analyst for live coverage of event!

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter:@CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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03 June 2011 22:04 GMT