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Four Rate Decisions Next Week in Shadow of U.S. Debt Deadline

Four Rate Decisions Next Week in Shadow of U.S. Debt Deadline

2011-07-29 21:17:00
Christopher Vecchio, CFA, Senior Strategist
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The week ahead will likely spark immense volatility, with four rate decisions on tap as well as the deadline for the United States government to raise its debt ceiling or face imminent risk of defaulting on its obligations. While the Reserve Bank of Australia’s, the Bank of England’s, and the European Central Bank’s respective rate decisions will likely fuel significant price action across the major currencies, the Bank of Japan rate decision will likely have minimal impact, as it is well-advertised that the central bank will keep rates on hold at near zero percent for a continued extended period.

Reserve Bank of Australia Rate Decision: August 2 – 04:30 GMT

The Reserve Bank of Australia will hold its August meeting on Tuesday, where it is widely expected that the rate will be maintained at 4.75 percent. At the previous board meeting in July, the Reserve Bank of Australia decided to hold the rate steady at 4.75 percent, a level that has remained unchanged since November 2010. With signs of recovery in investments and in a number of service sectors, the long-term outlook calls for an above average change in gross domestic product. In the medium-term, stagnant unemployment and a global economic downturn have resulted in a weaker than expected growth forecast for Australia through 2011. Similarly, according to the Credit Suisse Overnight Index Swaps, there is only an 8.0 percent chance of a 25-basis point rate hike at the central bank meeting on Tuesday. However, -28.0-basis points have been priced into the interest rate for the next 12-months indicating a cut in the rate is likely within this time frame. Join a DailyFX analyst for live coverage of event!

• U.S. Debt Ceiling Deadline: August 2 – --:-- GMT

August 2 marks the day that the U.S. government will no longer be able to pay its obligations, and thus presents an especially terse period of increased uncertainty across Dollar-based assets, from equities to Treasuries to the Greenback itself, over the coming days. Read more here: US Debt Ceiling Negotiation at Risk as Boehner Plan Vote Looms

Bank of England Rate Decision: August 4 – 11:00 GMT

The Bank of England’s Monetary Policy Committee is expected to maintain its key benchmark rate at 0.5 percent at its meeting on Thursday. The primary underlying reasonto maintain the rate continues to be the MPC’s focus on economic growth rather than on reducing inflation, which has subsided in recent months. Still, the United Kingdom is facing an inflation rate of 4.2 percent, more than double its target of 2 percent. Policy makers agree that the economic outlook is not stable enough to withstand higher rates at the current time, given the eroding condition of other aspects of the economy, mainly the housing and labor sectors. Traditionally, an inflation rate of this level would be a signal for the MPC to increase the bank rate but policy makers believe that inflationary pressures ‘will ease once food and oil prices come down.’ On July 7, the MPC voted 7-2 to maintain the official Bank Rate at 0.5 percent, leaving it unchanged for the 29th straight month.

The bank rate has remained at 0.5 percent since March 5, 2009, when it was lowered 50 basis points to its current level. With economic recovery expected to be shaky in the short and medium-term, the MPC will likely hold the bank rate at 0.5 percent through the end of 2011. The Overnight Index Swaps point towards the same conclusion, with a mere 3.0 percent chance of a rate hike expected at the meeting on Thursday.

European Central Bank Rate Decision: August 4 –11:45 GMT

The European Central Bank is expected to keep its key interest rate unchanged at 1.50 percent at its meeting on August 4th. On July 7, 2011, the Governing Council of the European Central Bank decided to increase the key interest rate by 25 basis points to 1.50 percent with European Central Bank President Trichet citing the reason for the increase as “essential so that recent price developments do not give rise to broad-based inflationary pressures over the medium-term.” Rising gross domestic product and other survey-based indicators are providing signs that the euro area is on its path to recovery, albeit at a slower pace. This is indicative of the interest rate remaining at 1.50 percent over the medium-term.

However, a slightly chance exists of a surprise rate hike at the meeting, with the Credit Suisse Overnight Index swaps pricing in a 61.5 percent chance of a rate hike at the meeting, a move that would certainly increase price action for the remainder of the trading session. Join a DailyFX analyst for live coverage of event!

United States Change in Non-farm Payrolls (JUL): August 5 – 12:30 GMT

According to a Bloomberg survey, economists have forecasted that July data will reveal an increase of 100K in U.S. Non-Farm Payrolls. The June figure came in at a dismal 18K despite economists forecasting a 105K increase. However, a slew of disappointing data releases over the past month coupled with economists largely missing the target on this indicator recently provides little confidence that the July number will be able to top estimates.

Similarly, economists expect the rate to remain at 9.2 percent. Last month, the unemployment rate unexpectedly rose to 9.2 percent invalidating economists optimistic forecast of a drop in the rate to 9.0 percent. Despite slightly better than expected Initial Jobless Claims data in two of the past three weeksManufacturing and Durable Goods Orders data released in July have been disappointing. Confidence remains low and consumer and investors remain cautious about spending amidst an ongoing debt crisis. In light of the situation, hiring will remain at low levels for some time. Aside from the debt ceiling deadline, the nonfarm payrolls report is the most important event of the first week of August.Join a DailyFX analyst for live coverage of event!

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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