bio1

European Central Bank to Cut Rates 0.50%, Forex Traders Look for Clues on Future Policy

Thursday, 15 January 2009 04:12:06 GMT  |  Ilya Spivak, Currency Analyst

The European Central Bank interest rate announcement headlines the economic calendar for the forthcoming session, with expectations calling for a 50 basis point cut to bring rates to 2.00%. Forex markets have likely priced in the outcome, with Euro trading hinged on the accompanying comments as traders look for where policy will go next.

Key Overnight Developments

• Australia sheds full-time jobs as firms cut back expenses
• Japan’s Machine Orders falls to lowest in over a decade
• Euro, British Pound correct higher after NY session selloff


Critical Levels



The Euro retraced close to half of the losses sustained in early New York trading to consolidate in a range above the 1.3150 level. The British Pound followed, retracing to the 61.8% Fibonacci retracement of the intraday decline (1.4630) to consolidate around the 1.46 mark.


Asia Session Highlights



Japan’s Domestic Corporate Goods Price Index fell for the fourth consecutive month, taking annualized wholesale prices to 1.1% in the year to December. Producer Price growth slowed dramatically as commodity prices reversed course from their breakneck rally in July. Easing inflationary pressure will give policymakers ample room to maneuver as the Bank of Japan looks past benchmark interest rates to boost credit access for domestic companies. A separate report showed Machine Orders fell a -27.7% in the year to November, the worst in over a decade, on dwindling overseas demand for Japanese cars and electronics.

Australia’s Employment Change reading surprised to the upside, showing the economy lost just -1.2k jobs in December. On the surface, this looks like a substantial improvement over expectations of a -20k decline. However, things are not as rosy as they appear: full-time positions dropped by a whopping -43.9k jobs while part time positions grew 42.8k. This amounts to near one-for-one shift from full to part time employment, with the net effect being a reduction in payable hours for over 40 thousand people that will depress wages and trim consumption. The change reflects companies’ efforts to reduce capacity and scale back expenses in the face of increasingly sluggish demand both at home and abroad. Underscoring the negative implications of the data, the Unemployment Rate ticked up to 4.5%, the highest since March 2007.


Euro Session: What to Expect



The interest rate announcement from the European Central Bank headlines the economic calendar for the forthcoming session, with expectations calling for a 50 basis point cut to bring rates to 2.00%. Overnight index swaps suggest the markets have priced in the outcome, so the reduction itself is unlikely to stir much volatility. Rather, most attention will be directed at President Jean-Claude Trichet’s comments accompanying the announcement for clues as to where money policy will go next. Traders are betting on another 75–100 basis points in easing over the next 12 months. The ECB has been particularly reluctant to cut rates as aggressively as the US Federal Reserve or the Bank of England. Inflation has fallen sharply – indeed, the Euro Zone Consumer Price Index is expected to see inflation confirmed at 1.6% in the year to December, below the ECB’s 2% reference level – giving the bank ample room for a looser posture. The tone of Trichet’s comments poses a dual threat for the Euro: if he is very dovish, he will boost expectations of future rate cuts which will weigh on the single currency; alternatively, if he is not dovish enough, this will be perceived as a threat to long-run economic growth and may also add selling pressure to the Euro.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars