Euro Mixed Ahead of ECB’s Rate Decision - Will They Announce Exit Strategies?

Euro Mixed Ahead of ECB’s Rate Decision - Will They Announce Exit Strategies?
The euro was mixed against the majors, as it fell against the US dollar and British pound but rose against currencies like the Japanese yen and New Zealand dollar. Looking toward the day’s economic news, Eurostat reported that producer prices in the Euro-zone rose by 0.2 percent during the month of October, due mainly to energy prices, pushing the annual rate up to -6.7 percent from -7.6 percent. This stronger-than-expected result along with Monday’s surprisingly high CPI reading of 0.6 percent suggests that the European Central Bank could strike a more hawkish tone on Thursday. Indeed, while the ECB is anticipated to leave rates unchanged at 1.00 percent at 7:45 ET, traders will be looking to comments from ECB President Jean-Claude Trichet at 8:30 ET. During his post-meeting press conference, the focus will be statements regarding exit strategies for the central bank’s liquidity programs, especially since he and other central bank members have suggested they will end the initiatives this month. Such a statement would likely drive the euro higher, but if Trichet indicates that they will continue with the programs, the currency may fall sharply.

Related: Discuss the Euro in the DailyFX Forum

US Dollar Up Slightly as US Equities Dip Lower - ISM Non-Manufacturing on Thursday
The US dollar saw increased volatility following the release of the Federal Reserve's Beige Book report, as it indicated that economic conditions had "improved slightly" in November. These improvements were due to moderate increases in consumer spending and auto sales, while manufacturing activity had been “steady” or “moderate.” Meanwhile, housing conditions remained fairly flat, with prices unchanged or down “modestly.” Likewise, commercial real estate deteriorated further as credit standards remained “tight” and loan demand was “steady to weaker.”  All told, the report suggests that aggressive discounting is driving consumption while export demand is likely behind improvements in manufacturing, but with commercial real estate still deteriorating, it’s clear that businesses are still under pressure.

The ISM non-manufacturing index is projected to rise to 51.5 in November from 50.6, which would be the highest reading since April 2008. With 50 being the point of neutrality, this would mark the third month of expansion in the sector. That said, a sharp improvement seems unlikely in light of the fact that the Conference Board’s measure of consumer confidence has been fairly weak. Overall, it would likely take an much better than expected result to elicit a strong reaction from the US dollar, though a surprise decline would provide equally choppy price action for the currency. The other factor to watch is the employment component, as another reading below 50 for the nineteenth straight month would suggest that the services sector will reflect net job losses in the non-farm payroll (NFP) report on Friday.

Related: Discuss the US Dollar in the DailyFX Forum

British Pound Rallies Following Hawkish Comments from BOE’s Dale
The British pound was the strongest of the majors on Wednesday, rallying more than 1 percent against the Japanese yen, amidst signs that UK conditions are improving. The Purchasing Managers' Index (PMI) for the UK's construction sector was marginally better than expected and rose to 47.0 in November from 46.2, suggesting that business activity is still contracting, albeit at a slower pace. The bigger news for the British pound, though, was in commentary from Spencer Dale, Chief Economist of the Bank of England. He said that the UK is "likely to be moving into a period of renewed expansion,” thanks to the depreciation of the British pound and an expected boost in output due to an adjustment in inventories. Dale, who dissented during the November monetary policy decision in favor of maintaining the level of asset purchases at £175 billion, said that he fully recognized the "potential benefits of a more expansionary policy given the downside risks to the economy," but that he was also cognizant of the "potential risks for such as policy." As we already know, the majority of Monetary Policy Committee (MPC) votes were in favor of expanding the Asset Purchase Facility by £25 billion to £200 billion, but Dale’s arguments suggest the central bank may not be keen on increasing the scale of the program again in the near-term.

Related: Discuss the British Pound in the DailyFX Forum

Japanese Yen Down Amidst Signs the BOJ is Losing Independence to Government Interests
The Japanese yen was the weakest of the majors on Wednesday as the currency continues to lose its link to risk trends. The decline came amidst signs that the independence of the Bank of Japan was deteriorating as they announced a 10 trillion yen program that will offer three-month loans to commercial banks at 0.1 percent in an effort to accommodate demands by the government to battle deflation. However, the BOJ stopped short of increasing its monthly target for government-bond purchases from 1.8 trillion yen. We call the BOJ’s independence into question because the central bank just recently lifted their economic assessment and announced plans to end some emergency liquidity programs, and continued signs of this dynamic are likely to weigh on the currency further. Overnight, data is expected to show that Japanese capital spending fell 16.0 percent in Q3 from a year ago. While this would indicate an improvement from the previous three quarters, it would also suggest that business confidence remains very low despite improvements in foreign demand for exports.

Related: Discuss the Japanese Yen in the DailyFX Forum

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com