Markets Await Comments by ECB Officials as Borrowing Costs are Expected To Remain at 1.00%
The European Central Bank is widely expected to keep their benchmark interest rate unchanged at 1.00 percent amid the brewing sovereign debt crisis in the bloc. Indeed, inflationary pressures have been subdued, while the unemployment rate in the 16 member euro area remains at a ten year high of ten percent, with Spain leading the way at 19.9 percent. At the same time, it seems apparent that policy makers are uncertain about economic activity going forward as they recently announced a wide forecast for GDP in 2011 at 0.2 percent to 2.2 percent.
Ahead of tomorrow’s release, investors are weighing in a zero percent chance that the central bank will hike rates twenty five basis points, according to the Credit Suisse Overnight index swaps. With ballooning budget deficits, the European Central Bank will likely keep rates near zero longer than previously expected, and will unlikely raise rates until possibly the third quarter of next year. It is also worth noting that tomorrow’s decision precedes the euro-zone’s bank stress tests results. According to an article by Reuters, European Central Bank President Jean Claude Trichet is said to meet with banks on July 21st, two days prior to when the results will be released. At the meeting, Trichet will evaluate whether some of the commercial lenders will need to recapitalize their balance sheets as the banking system remains weak. This gives further reasoning for the central bank to leaves rates unchanged as uncertainty in the banking sector continues to push the Euribor rate higher.
Growth has been tepid at best in the euro-area and with the onset of the Greek crisis, the ECB has few tools at its disposal to prevent the region from slipping further. Indeed, the euro-zone has recovered from its worst downturn since WWII; however, the region may slip back into recession by the end of this year as boiling deficits lead governments to phase out stimulus measures. All in all, central bank President Jean-Claude Trichet’s post-announcement press conference is likely to stay firmly focused on the issues related to indebted countries in the bloc and the upcoming stress tests measures.
EUR/USD: Price action has extended yesterday’s gains and now looks poised to test 1.280 as the pair recently crossed over above the 50-day SMA. At the same time, we are witnessing a positive slope in the 20 day SMA, which is now approaching the 50-day SMA. A crossover of the lower moving average above the 50 day is indicative of further gains. It is also noteworthy that price action looks to be nearing oversold territory, thus, we may see the pair test 1.270 for near term support.
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Written by Michael Wright, Currency Analyst
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