Euro Takes Center Stage as European Central Bank Announces Interest Rates

Key Overnight Developments

• Australian Dollar Soars as Jobs Report Boosts Interest Rate Outlook
• US Dollar Lower Amid Stock Gains as Inverse Link With Risk Returns

Critical Levels



The Euro added 0.3% against the US Dollar while the British Pound consolidated below the 1.63 level to yield a flat result ahead of the opening bell in Europe. We remain short EURUSD at 1.4881 but have opted to exit our short GBPUSD position.

Asia Session Highlights



The Australian Dollar surged as much as 0.7% on average against its major counterparts after December’s labor market figures printed much stronger than economists expected. The economy added 35,200 jobs, more than tripling economists’ forecast for a 10,000 gain. Further, the Unemployment Rate fell to 5.5%, the lowest in 8 months, amid expectations for an increase to 5.8% from the 5.7% recorded in November. The outcome stoked expectations that the Reserve Bank of Australia will continue to raise borrowing costs when policymakers convene to set monetary policy in February. Indeed, a Credit Suisse gauge tracking priced-in yield expectations is now showing traders now see a 76% probability of a rate hike at the next RBA meeting, up from 60% just yesterday.

The US Dollar traded broadly lower,) sliding -0.2% as stocks pushed higher following positive momentum out of Wall St and further encouraged by Australia’s employment figures. The inverse relationship between risk trends and US unit has vigorously returned after fading in December, with the Dollar Index (an average of the greenback’s value against six top currencies) now -79.6% correlated with the MSCI World Stock Index versus a negligible 0.11% just a week ago.


Euro Session: What to Expect



An interest rate decision from the European Central Bank headlines the economic calendar. Benchmark interest rates will almost certainly remain unchanged at 1%, with all eyes focused on ECB President Jean-Claude Trichet’s post-announcement press conference as traders search for any clues about the central bank’s exit strategy for its unconventional easing programs as well as any comments about the deepening debt crisis in Greece.

On balance, the central bank seems likely to remain in “wait-and-see” mode for the time being. Inflation figures recovered from negative territory in November and flash estimates point to acceleration in December, while the final revision of Germany’s latest Consumer Price Index figures is set to confirm that prices grew at the fastest in 8 months in December. This means the currency bloc may skirt deflation without additional monetary easing, while rate hikes remain complicated by the need to strike a delicate balance between needs of relatively better-off countries (like Germany and France) with far more damaged economies (like Spain). Indeed, tightening monetary conditions now as several Euro Zone members sharply cut back government spending to rein in their deficits would severely widen the rift between rich and poor countries within the currency bloc, likely producing a harsh political response that could conceivably endanger the structural integrity of the single currency.

November’s Industrial Production rounds out the calendar, with expectations calling for output to shrink -8.4% from the previous year, the smallest decline in 13 months. Output has rebounded from a record low in April over recent months as close to $2 trillion in combined global fiscal stimulus underpinned overseas demand.

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