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FOREX: Euro May Fall Even if ECB Opts Not to Cut Interest Rates

FOREX: Euro May Fall Even if ECB Opts Not to Cut Interest Rates

2011-10-06 06:45:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • US Dollar, Japanese Yen Outperform as Risk-Averse Dynamics Return Overnight
  • British Pound Sold Ahead of Bank of England Rate Decision on QE Reboot Fears
  • Euro Appears Vulnerable Regardless of ECB Decision on Benchmark Interest Rate

The US Dollar and Japanese Yen outperformed in overnight trade, rising against their major counterparts as markets corrected following a recovery in risk appetite that weighed on the two go-to safe havens over the preceding 24 hours. Traders in the FX space largely ignored a substantial advance across Asian bourses, with the rally dismissed as a catch-up move to the gains seen earlier on Wall Street rather than a response to anything materially new in the financial landscape.

The British Pound was uniformly sold against the majors ahead of the upcoming Bank of England monetary policy announcement, with a dovish set of minutes from last month’s sit-down stoking expectations that the bank is preparing to reboot its quantitative easing program. With that in mind, the rate-setting MPC committee has previously waited for the publication of an updated quarterly Inflation Report to make major changes in the policy mix, meaning they may wait until November to pull the trigger.

Needless to say, the European Central Bank interest rate decision is the other headline announcement on the docket, with traders looking for Jean-Claude Trichet and company to step in with additional support as EU politicians continue to wrangle over ways to rebuild confidence with seemingly nothing tangible besides empty rhetoric emerging so far. The markets are pricing in a 55.8 percent probability of a 25bps interest rate cut according to data compiled by Credit Suisse. The reintroduction of 6- and/or 12-month long-term repo operations (LTRO) to feed liquidity into the banking system is also a possibility.

On balance, the Euro may find itself on the defensive regardless of the ECB’s decision on the benchmark lending rate. If the bank opts to leave it unchanged, markets may sell the single currency amid disappointment that more is not being done to support regional economies as they battle the debt crisis. Indeed, sagging growth eats into tax receipts, making it that much more difficult to close budget shortfalls. On the other hand, if the ECB does issue a rate cut, it seems difficult to argue that currency will not see at least some selling as the return on holding declines, despite such a decision’s positive implications for risk appetite.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

2:00

JPY

Tokyo Average Office Vacancies (%) (SEP_

8.64%

-

8.65%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

CHF

Foreign Currency Reserves (SEP)

-

253.4B

Low

7:00

GBP

Halifax House Price (3MoY) (SEP)

-2.1%

-2.6%

Medium

7:00

GBP

Halifax House Price (MoM) (SEP)

0.2%

-1.2%

Medium

7:15

CHF

Consumer Price Index (MoM) (SEP)

0.1%

-0.3%

Medium

7:15

CHF

Consumer Price Index (YoY) (SEP)

0.3%

0.2%

Medium

7:15

CHF

CPI - EU Harmonized (MoM) (SEP)

-

-0.6%

Medium

7:15

CHF

CPI - EU Harmonized (YoY) (SEP)

-

-0.3%

Medium

8:30

GBP

BoE Housing Equity Withdrawal (£) (2Q)

-6.0B

-5.8B

Low

8:30

GBP

Index of Services (MoM) (JUL)

-0.1%

-0.1%

Low

8:30

GBP

Index of Services (3Mo3M) (JUL)

0.9%

0.5%

Low

10:00

EUR

German Factory Orders n.s.a. (YoY) (AUG)

4.7%

8.7%

Medium

10:00

EUR

German Factory Orders s.a. (MoM) (AUG)

0.0%

-2.8%

Medium

11:00

GBP

BOE Asset Purchase Target

200B

200B

High

11:00

GBP

Bank of England Rate Decision

0.5%

0.5%

High

11:45

EUR

European Central Bank Rate Decision

1.5%

1.5%

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3277

1.3401

GBPUSD

1.5405

1.5505

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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