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Central Banks to Ease Further This Week as ECB Headlines Event Risk

Central Banks to Ease Further This Week as ECB Headlines Event Risk

Christopher Vecchio, CFA, Senior Strategist

With January in the rearview mirror, the U.S. Dollar appeared primed to start February with a bang. Technically, the U.S. Dollar and its crosses were hitting extreme technical bounds, in favor of U.S. Dollar strength in the near-term. This was not the case, with the world’s reserve currency posting declines against all the majors, save the Japanese Yen, in the first three days of trading this month. A series of better than expected data prints – including Friday’s exceptionally bullish nonfarm payrolls January reading – has continued to bolster risk-appetite. With volume continuing to lack on equity markets, I still refrain from calling this move higher by higher yielding currencies and risk-correlated assets as constructive.

In terms of scheduled event risk this week, the majority of significant data comes later in the week, central bank rate decisions come into focus. Due first is the Reserve Bank of Australia, which is forecasted to cut rates for the third consecutive meeting (more on that later), while both the Bank of England and the European Central Bank are expected to keep rates on hold. Otherwise, Chinese inflation data is due, while a gauge of American consumer confidence will come in on Friday.

AUD Reserve Bank of Australia Rate Decision: February 7 – 03:30 GMT

The Reserve Bank of Australia will hold its February meeting on Tuesday, where it is expected that the rate will be cut to 4.00from 4.25 percent. At the previous board meeting in December, the RBA decided to cut the key rate to 4.25 percent from 4.50 percent; the RBA cut to 4.50 from 4.75 percent in November, a level that was unchanged in 12-months. According to the Credit Suisse Overnight Index Swaps, there is an 82.0 percent chance of a 25-basis point rate cut at the central bank meeting on Tuesday. Accordingly, 84-basis points are being priced out over the next 12-months, in line with the expectation of a rate cut at the coming meeting.

Considering expectations for a cut are so heavy, if the RBA does not budge, the Australian Dollar should find some significant support. That being said, despite two rate cuts in each of the past two meetings, the Australian Dollar is among the best performers this year. The rhetoric in the statement following the meeting is vital. Join a DailyFX analyst for live coverage of event!

CNY Chinese Consumer Price Index (YoY) (JAN): February 9 – 01:30 GMT

According to a Bloomberg News survey, price pressures are expected to have abated further in China during January, with the consumer price index forecasted to decline to a 4.0 percent rate on a yearly basis. Inflation had fallen back below the 5.0 percent threshold in November, when it decelerated to 4.2 percent, for the first time since February 2011. This would mark the continuation of a significant reversal in price pressures in China, having last been at 4.0 percent or lower in September 2010, when he rate was 3.6 percent, year-over-year.

Interestingly enough, a dip in the Chinese CPI could be favorable for the Australian Dollar, given Australia’s strong link to the Chinese economy. If the People’s Bank of China is forced to ease further, it would be supportive of future growth prospects, which would thus boost prospects for Australia’s mining sector, their largest and most important part of the economy.

GBP Bank of England Rate Decision and Asset Purchase Program: February 9 – 12:00 GMT

The Bank of England’s Monetary Policy Committee is expected to maintain its key benchmark rate at 0.50 percent at its meeting on Thursday, the same rate held since March 2009. The primary underlying reasonto maintain the rate continues to be the Monetary Policy Committee’s focus on economic growth rather than on reducing inflation, which ticked higher recently.The Overnight Index Swaps suggests rates will be on hold for some time, though there is an odd 49.0 percent chance of a rate hike at the meeting on Thursday (this appears to be skewed data, due to the Pound’s recent appreciation against the safe haven currencies).

It is also important to watch whether or not the Committee expands the central bank’s asset purchase program again – it is forecasted to increase to £325billion – a move that would be an extension of quantitative easing, thus weakening the British Pound. Join a DailyFX analyst for live coverage of event!

EUR European Central Bank Rate Decision: February 9 – 12:45 GMT

The European Central Bank is expected to cut its key interest rate to 1.00 percent at its meeting on February 9. At the previous ECB meeting in January, President Mario Draghi and the Governing Council held the rate at 1.00 percent, after cutting its key rate in both November and December. According to the Credit Suisse Overnight Index Swaps, there is a 58.1 percent chance of a 25-basis point rate cut at the central bank meeting on Thursday.

As Euro-zone growth stalls and increasing pressure brought by the market comes down on periphery nations’ bond markets (without ECB help, Italian yields would be well-above 7 percent, in my opinion), Draghi has fielded an increasing number of calls by politicians and market participants alike to ease further, as a way to keep liquidity flowing. To this end, the long-term refinancing operation has provided that support, but more clarity on the ECB’s path is expected to be revealed at the post-meeting press conference. Join a DailyFX analyst for live coverage of event!

USD United States U. of Michigan Confidence (FEB P): February 10 – 14:55 GMT

Consumer confidence in the United States is forecasted to improvedeteriorate in February’s preliminary reading, after continuing its recent resurgence to 75.0 in January. According to a Bloomberg News survey, the reading is expected to come in at 74.5, marking the first time the gauge would post consecutive closes above 70.0 since May and June 2011. The 74.5 forecast comes after a string of better-than-expected data out of the United States suggests that the world’s largest economy might be able to avoid the second leg of a double dip recession, should the Euro-zone manage to stay together. Confidence is likely to be lower on developments outside of the United States, but a stronger-than-expected reading is absolutely a possibility, given last week’s exceptional nonfarm payroll figures. Join a DailyFX analyst for live coverage of event!

Rate Hike Probabilities / Basis Point Expectations (12-months)

Central_Banks_to_Ease_Further_This_Week_as_ECB_Headlines_Event_Risk_body_Picture_1.png, Central Banks to Ease Further This Week as ECB Headlines Event Risk

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

--- Written by Christopher Vecchio, Currency Analyst

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