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Dollar to Rise if ECB Fails to Deliver on Ambitious Stimulus Hopes

Dollar to Rise if ECB Fails to Deliver on Ambitious Stimulus Hopes

2012-08-02 05:50:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • US Dollar Set to Rise if ECB Fails to Deliver Rate Cut, SMP Reboot
  • New ECB LTROs, Looser Collateral Rules May Boost Risk Trends
  • Bank of England Rate Decision Likely a Non-Event with MPC on Hold

All eyes have turned to the European Central Bank monetary policy announcement after the Federal Reserve disappointed on additional stimulus as expected. The pursuit of additional stimulus measures stands to support risk appetite considering the Eurozone recession represents the most significant headwind facing global growth this year. With that in mind, the bar has been set rather high, meaning the ECB will have a hard time producing a substantively risk-supportive outcome.

Investors have been pricing in the probability of a 25bps interest rate cut this month at over 80 percent since July’s ECB meeting. Last week, ECB President Mario Draghi upped the ante, saying that if swelling sovereign risk premia in bond yields disrupt monetary policy transmission, dealing with them falls within the ECB’s mandate. On balance, that suggests the markets’ status-quo scenario is for a rate cut plus a reboot of the SMP bond-buying program.

Failure to deliver at least this much is likely to carry significant negative implications for risky assets and sentiment-linked currencies while boosting the safe-haven US Dollar. To meaningfully boost sentiment, the ECB will need to come through with added firepower, perhaps announcing another round of 1-3 year LTRO operations and/or a further relaxation of collateral rules to expand banks’ access to ECB funds. Such a result has scope to support risk appetite, with the stocks-geared Australian, Canadian and New Zealand Dollars positioned to see outsized gains. The Euro is likewise expected to rise in such a scenario, reflecting the apparent primacy of risk trends as the driver of price action.

The Bank of Englandinterest rate decision is likely to register as non-event. BOE Governor Mervyn King and company are widely expected to keep the levers of monetary policy unchanged from their current setting, waiting to gauge the impact of the recently unveiled ECTR and FLS programs before tinkering with new ideas again. Still, it is important to keep in mind that the rate-setting MPC committee will be making this decision on the basis of an updated quarterly inflation report, which hints the slight possibility of an unexpected change in the policy mix does exist.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:50

JPY

Monetary Base (YoY) (JUL)

8.6%

-

5.9%

1:00

NZD

ANZ Commodity Price (JUL)

-0.5%

-

-2.4%

1:30

AUD

Trade Balance (A$) (JUN)

9M

-375M

-313M (R-)

1:30

AUD

Retail Sales s.a. (MoM) (JUN)

1.0%

0.7%

0.8% (R+)

1:30

AUD

Retail Sales Ex Inflation (QoQ) (2Q)

1.4%

0.9%

1.4% (R-)

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

-

GBP

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

-

1.0%

Low

-

GBP

Halifax House Price (3MoY) (JUL)

-

-0.5%

Low

7:15

CHF

Retail Sales (Real) (YoY) (JUN)

-

6.2%

Low

7:30

CHF

SVME-Purchasing Managers Index (JUL)

47.0

48.1

Medium

8:30

GBP

Purchasing Manager Index Construction (JUL)

48.7

48.2

Medium

9:00

EUR

Euro-Zone Producer Price Index (MoM) (JUN)

-0.4%

-0.5%

Medium

9:00

EUR

Euro-Zone Producer Price Index (YoY) (JUN)

1.9%

2.3%

Medium

11:00

GBP

BOE Asset Purchase Target (AUG)

375B

375B

High

11:00

GBP

Bank of England Rate Decision (AUG 2)

0.50%

0.50%

High

11:45

EUR

European Central Bank Rate Decision (AUG 2)

0.75%

0.75%

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2183

1.2302

GBPUSD

1.5480

1.5641

--- 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

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

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