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ECB to Keep Rates Unchanged, But Will Trichet to Maintain His Upbeat Tone?

ECB to Keep Rates Unchanged, But Will Trichet to Maintain His Upbeat Tone?

2011-02-02 19:10:00
Michael Wright, Currency Analyst
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Feb 03

ECB Rate Decision (09:00 GMT)

Expectations: 1.00%

Prior: 1.00%

Fundamental Outlook

Currency traders will place the spotlight on the euro as the single currency remains at the crossroads ahead of the highly anticipated European Central Bank interest rate decision. Some market participants are betting that the ECB will raise rates twenty five basis points in the coming months as consumer prices surpassed the central bank’s 2 percent target for the first time since November 2008. As for tomorrow, according to the Credit Suisse overnight index swaps, market participants are pricing in a zero percent chance that policy makers will raise rates to 1.25 percent as uncertainty surrounding the economic outlook remain. As the recovery in the euro area as a whole remains off tract, the ECB will keep rates unchanged. In turn, comments trailing the decision will dictate price action.

At last month’s meeting, ECB president Jean-Claude Trichet was surprisingly hawkish. The central bank head said that risks for inflation could intensify as energy prices increase, while noting that the risk for growth remained “slightly” tilted to the downside. Furthermore, ECB board member Lorenzo Bini Smaghi recently said that imported inflation can “no longer be ignored.” If Trichet’s dour tone surrounding growth drops paired with a further optimism in the region, I would not rule out additional gains in the euro.

Meanwhile, bond prices of troubled economies in the bloc have been gaining momentum as market participants anticipate that EU leaders will agree to expand the regions bailout fund. It is also worth noting that Portugal had a successful bond auction today as the country sold 800 million euros in 12 month bills 455 million euros in six month bills at a lower interest rate than the previous auction. At the same time, Spain is expected to turn to the bond markets tomorrow. Other news that has eased debt concerns includes Ireland narrowing its budget deficit from 779.8 million to 483.2 million in January from the same time last year, while Euro-zone consumre prices, industrial production, and manufacturing showed improved readings recently.

All in all, the ECB may keep rates unchanged as policy makers aim to cement the economic recovery in the 17 member euro area. With the region gaining strength, traders should not rule out a hawkish press conference which will validate further gains in the single currency. Join me to cover the event live!

Technical Outlook

EURCHF 4 Hour Chart

ECB_to_Keep_Rates_Unchanged_in_February_body_eurchf1.png, ECB to Keep Rates Unchanged, But Will Trichet to Maintain His Upbeat Tone?

Charts Created Using FXCM’s Strategy Trader – Prepared by Michael Wright

EURCHF: The pair recently broke above its descending trend line dating back to November. Indeed, my short position from 1.295 was knocked out as price action managed to break above this area. The formation is interesting due to the fact that markets were faced with a similar set up in the AUDUSD ahead of the RBA rate decision. Indeed, past results are not indicative of future results, but the break above does warrant attention.

For More Technical Analysis Visit the DailyFX Technical Page

Written by Michael Wright, Currency Analyst

To Receive Future Articles by Email, please contact me at instructor@dailyfx.com

Michael Wright authors FX Headlines, Fundamentals vs. Technical’s, Intraday Trading, Weekly Spotlight, and Forex Trading Weekly Forecast

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

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