Euro Volatility Surges Ahead of Critical ECB Decision, US NFP’s

The European Central Bank will once again take center-stage in the highly-anticipated rate decision on Thursday, while earlier-week Euro Zone CPI and Unemployment figures could likewise prove strongly market-moving. ECB Officials will almost certainly leave the benchmark interest rate unchanged at 1.00 percent, but credit markets are on edge in expectation of staff forecasts, key lending decisions, and any rhetoric on exit plans for its aggressively accommodative monetary policy stance. The staff forecasts may prove especially pertinent to interest rate expectations, and many predict that officials will upgrade growth and inflation figures for 2010. Overnight Index Swaps currently price in a modest 84 basis points in ECB rate hikes through the coming 12 months—a considerable drop from the 100+ points priced in just several weeks ago. Suffice it to say, any especially surprising rhetoric from the ECB could move the Euro itself—especially if the bank hints that rate hikes will come sooner than later.

ECB watchers will certainly keep a close eye on earlier-week Euro Zone CPI and Unemployment figures ahead of the rate announcement, and any particularly large surprises could alter market sentiment headed into the event. Euro traders will otherwise keep a similarly attentive view of global financial market risk sentiment. The news that Dubai World—the investing arm of the Dubai Government—was effectively defaulting on its debt was a clear reminder that global credit markets remain strained. Any further signs of trouble across credit markets could cause further surges in FX market volatility, and Forex Options traders are pricing in substantial price moves in the week ahead. Suffice it to say, traders should look to control excessive FX exposure ahead of what promises to be a very eventful week of trading. – DR