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BoE Leaves Benchmark Rate Unchanged, Will Trichet Follow Suit?

Thursday, 04 September 2008 11:13:44 GMT  |  John Rivera, Currency Analyst

The BoE left their benchmark rate unchanged at 5.00% as the upside risks to inflation remain a prohibitive factor in allowing the central bank to turn its attention toward promoting growth. The pound was finding support throughout overnight trading as the result was expected.

 

Talking Points   

·          Japanese Yen: Bounces From Support At 107.90

·          Pound: BoE Leaves Rates On Hold

·          Euro:  Gives Back Gains Ahead Of ECB Decision.

·          US Dollar: ISM Services And ADP Employment On Tap

 

BoE Leaves Benchmark Rate Unchanged, Will Trichet Follow Suit?

 

The BoE left their benchmark rate unchanged at 5.00% as the upside risks to inflation remain a prohibitive factor in allowing the central bank to turn its attention toward promoting growth. The pound was finding support throughout overnight trading as the result was expected. The Sterling would rally on the news and has climbed back above the 1.7800 price level. Since, there was no policy action the central bank doesn’t release a statement until September 17, when we will see how close the committee came to reducing rates. The prolonged housing slump and credit crisis has brought the economy to the brink of a recession, but recent measures by the central bank to provide assistance to the economy may keep them on hold as they asses their impact. 

 

After reaching as high as 1.4547 the Euro has given back most of its gains as the ECB rate decision looms at 7:45 EST. The central bank leader’s comments are expected to be more hawkish than the previous meeting as several committee members including Axel Weber have stressed that they haven’t abandoned their focus on price stability. Therefore, expectations are that the central bank will leave rates unchanged at 4.25%. However, giving the recent weakness in the Euro, traders may be second guessing the tone of the rhetoric.

Indeed, German factory orders falling 1.7% in July demonstrates that the European economy is clearly deteriorating and the last rate hike may need to be reversed to prevent a full blown recession.

 

The U.S. calendar will provide event risk in the form of ADP employment change and ISM Non-manufacturing. The employment report is not an accurate indicator for Friday’s NFP release, nonetheless it typically generates some price action as traders tried to find insight into the labor market and the expected 30,00 loss in private sector jobs could weigh on the dollar. The ISM Non-manufacturing release will provide a better gauge as its employment component is far more predictive. Expectations are that the service sector contracted for a third month, remaining unchanged with a reading of 49.5, below the 50 boom/bust level. An inline result will only reinforce the gloomy outlook for the U.S. economy that was generated by yesterday’s Beige Book report which showed, housing conditions deteriorating, inflation rising and credit markets tightening. However, the upcoming comments from President Trichet may have the ultimate impact on the greenback’s direction today.

 

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For More Fundamental Analysis, Check Out Our Other Daily Reports.

 

Related Articles: A Contraction In Services Coincides With Bullish EURUSD Technical Outlook

 

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