Will it be the Bank of England or the European Central Bank that cuts interest rates more? Markets have priced in numerous rate cuts for the following year, but have yet to decide which bank will blink first. As growth and energy prices decline, it is reasonable to assume that each bank will need to react soon. Either way, for now it appears as though both King and Trichet will follow similar paths, continuing to stabilize the lack of relative strength between the Euro and British Pound.
Trading Tip – Bank of England minutes may exhibit a central bank eager to react to the slowing economy. As such, the release may see the Pound sell off as traders anticipate rate cuts from the bank. As a precaution, traders may want to wait for the release to pass before setting their entry orders. In addition to a stop loss, we will look to control risk further by removing any unfilled orders by the end of the week or should spot close above 0.8026 prior to our order being filled. Event Risk for Europe and the UK Europe – The Euro-Zone Trade Balance number for July is expected to come in at -3.0B during Wednesday’s trading. The metric, which comes out in an untimely manner, is expected to widen from June’s -0.1B deficit as increased Euro strength continued to weaken the bloc’s export sector. As such, Wednesday’s release will probably have little effect on the EURGBP given that next month’s release will probably improve as increased Dollar strength may have added to greater demand for European goods. Friday will see the release of Producer Prices for August. Production costs are expected to follow the commodity price decline seen in the same month, falling by -0.5%. With that in mind, traders may use this information to forecast consumer price decreases as producers pass on the savings associated with such cost declines. Downside surprises would give the European Central Bank greater breathing room in conducting future rate moves. UK – Minutes from the Bank of England’s September 4th meeting will be released on Wednesday. The highly anticipated release will be scanned for explicit language indicative of Mervyn King’s stance on interest rates. Language insinuating that the bank may be more concerned with growth over inflation may offer the market anticipation of rate cuts. Such rhetoric could see the Pound sell off within minutes of the release. Retail Sales are expected to have declined by -0.4% in August as falling fuel prices have dampened the metric’s findings. Slower overall growth is also a likely culprit due to its impact on rising unemployment and its inherent ability to marginalize aggregate spending power. Despite the importance of Sales figures, all eyes will be on the bank’s policy minutes. To contact Ilya and Luis with comments regarding this or other articles they have authored, please email them at research@dailyfx.com