ECB And BOE And Interest Rate Meetings Ahead
U.S. Dollar Trading (USD) July 4th celebrations kept the US session quiet with commodities and stock markets closed. The EUR/USD is continued to be weighed by the expectations of a rate cut today at the ECB meeting. The reaction to a rate cut will depend on the stock market reaction with a positive move to the policy action potentially resulting in gains for the EUR/USD. The more traditional response is a drop in the currency if you cut the interest rate investors receive. Looking ahead, Weekly Jobless Claims forecast at 385k vs. 386k previously. Also June ISM Services forecast at 53 vs. 53.7 previously. Also June ADP National Employment forecast at 105k vs. 133k previously.
The Euro (EUR) the EUR/USD eased back towards 1.2500 as yields began to creep higher in Spanish and Italian debt. Germany’s Merkel once again stated here opposition to the Eurobond idea whilst the Italian PM voiced his support for the idea. The Sterling (GBP) the GBP/USD fell below 1.5600 as its own risk event weighed with the BOE rate announcement today and expected to result in some form of easing for the UK economy. The EUR/GBP has been very stable in a 0.8000-0.8050 range. Also ahead, ECB Rate Announcement forecast to cut to 0.75% vs. 1% previously. BOE Rate announcement forecast to hold at 0.5%. The BOE Asset Purchase program is forecast to expand to 375bn vs. 325bn previously.
The Japanese Yen (JPY) the USD/JPY is holding under Y80 finding support on dips and pressuring the key topside level. BOJ officials have continued to comment to the market that they will keep monetary policy aggressively loose. EUR/JPY is pressuring Y100 as the EUR/USD falls into the ECB meeting. Australian Dollar (AUD) the AUD/USD is holding to a tight range just under 1.0300 as the market consolidates. The AUD/USD did push above 1.0300 briefly in Asia yesterday on the stronger than expected May Retail Sales but traders are hesitant to be too long into the ECB and Nonfarm Payrolls. Looking ahead, AUD May Trade Balance forecast at -500mn vs. -203mn previously.
Oil & Gold (XAU) Gold remained strong supported on dips to $1612 finishing roughly unchanged near $1620. OIL/USD eased a little bit as profit taking emerged after the $10 a barrel rally in previous few days. Support was found at $86.50
Thinned Conditions Weigh On The Euro
The euro struggled overnight amidst the low liquidity environment as the US was on holiday. EURUSD pushed well clear of 1.2600 but came short of breaking 1.2500. The euro was not the only currency affected, the aussie and kiwi were also fairly volatile overnight but they managed to avoid the sell-off that hit EUR. Surprisingly, the yen had a fairly quiet overnight session, with USDJPY still remaining trapped below 80.00.
Whilst the thinned conditions made for some interesting trading in FX markets, indices remained fairly steady. Most major equity markers did, however, fall into negative territory as investors struggled to find any reason to rally. Overnight, PMI data from Europe was mostly better than expected but still printed well into contraction territory (even the ever resilient German service data declined). Hence, investors remain cautious about the health of the eurozone, which when coupled with the thin conditions creates the perfect cocktail for euro bears.
Focus now shifts to the BOE and ECB, who are both expected to ease during their overnight meetings. The ECB is expected to cut rates by 25 bps and the BOE is expected expand its asset purchase facility by GBP50-75. However, there is the possibly the ECB will move more or less than expected, which should make it an interesting night for the euro.
Before the market refocuses on Europe, trade balance data of Australia will be closely watched by AUD investors. Those hoping to see Australia print its first monthly trade surplus in 2012 are likely to be disappointed, with the headline figure expected to be in deficit by around AUD500-600 million (consensus -500). Exports of Australia’s two largest commodities had a jumpy start to year as they were hit from both the demand and supply sides, whilst at the same time domestic demand has increased. Overall, the trend towards imports and away from exports is ensuring that Australia’s external accounts remain in the red.
