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European Central Banks Need to Over-Deliver to Boost Risk Appetite

European Central Banks Need to Over-Deliver to Boost Risk Appetite

2012-07-05 07:08:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • ECB, BOE Must Top Stimulus Bets to Meaningfully Boost Risk Appetite
  • British Pound Likely to Fall in With Sentiment Trends on BOE Outcome
  • Euro Vulnerable on ECB Rate Cut Despite Well-Established Expectations

European monetary policy is in focus today with the European Central Bank and the Bank of England both due to deliver interest rate announcements. The ECB is expected to cut its benchmark lending rate to a record-low 0.75 percent while the BOE is seen boosting asset purchases by £50 billion. A recession in Europe represents the most significant headwind facing overall global economic growth this year. With that in mind, additional monetary stimulus in the region ought to be supportive for risk appetite and corresponding currencies.

In practical terms, the announcement’s impact on price action will depend on how the degree of easing on offer squares with market expectations. Economists’ median expectations have favored a third-quarter ECB rate cut for six weeks now, so a 25bps reduction in the headline lending rate alone may not amount to a meaningful-enough inflection point to materially boost risk appetite. A rate cut coupled with guidance on additional LTRO operations or even a reboot of the ECB’s bond-buying program is likely to be cheered on by investors however, driving the stocks-geared Australian, Canadian and New Zealand Dollars higher.

As for the Euro itself, the blow to yield support may be overwhelmed by buoyant risk trends in the near term if the rate cut is indeed already reflected in exchange rates. Data compiled by Credit Suisse warns that investors are pricing in a mere 45 percent probability of a reduction however, warning that an outcome in line with expectations may still have scope to weigh on the single currency.

Turning to the BOE, an increase in asset purchases appears widely expected at the analyst level as well. Out of 40 economists polled by Bloomberg, just two expect the size of QE to remain at £325 billion and only one calls for a smaller-than-expected £25 billion increase. That suggests markets will treat an increase to £375 billion as effectively status-quo. For the outcome to significantly boost risk appetite, a larger expansion seems necessary.

For the British Pound, correlation studies suggest prices are far more sensitive to risk trends than yield concerns at the moment. That means the UK unit is likely to be particularly well-supported against haven currencies like the US Dollar and Japanese Yen given a risk-on scenario. Higher yielders like the Aussie and Kiwi Dollars would still be expected to outperform however.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

1:30

AUD

Trade Balance (A$) (MAY)

-285M

-500M

-26M (R+)

2:00

JPY

Tokyo Avg Office Vacancies (%) (JUN)

9.43

-

9.40

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

GBP

Halifax House Price (3MoY) (JUN)

-0.8%

-0.1%

Low

7:00

GBP

Halifax Plc House Prices s.a. (MoM) (JUN)

-0.2%

0.5%

Low

10:00

EUR

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

0.0%

-1.9%

Medium

10:00

EUR

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

-6.0%

-3.8%

Medium

11:00

GBP

Bank of England Rate Decision (JUL 5)

0.50%

0.50%

High

11:00

GBP

BOE Asset Purchase Target (£) (JUL)

375B

325B

High

11:30

USD

Challenger Job Cuts (YoY) (JUN)

-

66.7%

Low

11:45

EUR

European Central Bank Rate Decision (JUL 5)

0.75%

1.00%

High

12:30

EUR

ECB President Draghi Holds Press Conference

-

-

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2487

1.2588

GBPUSD

1.5545

1.5663

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

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya 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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