Trichet’s words could lead to volatility
FOREX.COM
KATHLEEN BROOKS
The markets have been embracing the euro with gusto this week. Partly this is a response to the weak US labour market data for May, but it is also due to expectations that the ECB will signal a rate rise in July when it meets on Thursday. The hawkish rhetoric from ECB members recently, including from President Trichet himself, makes the use of the phrase “strong vigilance” likely in our opinion. The FX market is positioned for this, and euro-dollar has jumped six big figures in two weeks. If Trichet does utter these words then we may see euro-dollar test $1.4900/50 – the highs from early May – and a similar euro-sterling jump to £0.9000. However, when the market seems as sure of itself as it does this week the risk is that it is wrong. If Trichet fails to deliver the goods then this would be a dovish signal and we could see a sharp sell-off possibly back to the $1.4350 prior resistance zone. The ball is definitely in Trichet’s court so traders need to be nimble.
We expect the BoE to be another non-event and not to have much impact on the pound. In terms of positioning, sterling is being moved around by two external factors: firstly, where the dollar is going and secondly, what the euro is doing. We don’t expect this to change anytime soon, but we may see some broad-based sterling weakness if the ECB signals a further normalisation of monetary policy next month, which would serve to highlight the Bank of England’s reluctance to adjust monetary policy.
IG INDEX
DAVID JONES
Interest rate decisions are pretty boring events for markets at the moment. Much more weight, particularly in the UK, is being given to the minutes released a week or so after the meeting as traders pore over them to try and figure out if the balance towards monetary policy is shifting.
The ECB decision is potentially the one that could add some volatility. Again, no change is expected here but the central bank is expected to give a clear signal that rates will be going up once again next time around in July. The challenge here is just how much of this is already being factored into the price of euro-dollar as it is hardly a secret. Considering that the euro has rallied by around 600 points against the dollar in the last couple of weeks, maybe the strategy is to go for a contrarian play – the market is expecting a signal that rates will go up and is factoring it in; there is the potential for a big disappointment and maybe the euro has come far enough – the $1.4900 area was a big barrier in early May.
Once the decision is out of the way, it could be the catalyst for some euro selling to come in, so placing a short sell with a sensible stop loss may be an interesting trade.
ALPARI UK
JAMES HUGHES
Thursday’s rate decisions could be some of the most important in recent months, as both economies have been stuck with their own set of problems. Yesterday’s news that the IMF are backing the UK government in their austerity measures will have been met with a sigh of relief from Mr Osborne and his staff. This will leave the BoE with little to do. However, the IMF support is based on the perception that the inflation rate will move closer to the bank’s 2 per cent target in the near future. Something that has been causing some interesting votes among the committee.
The ECB is in a much more aggressive mood when it comes to monetary policy and it seems that momentum is growing for yet another rate hike. The fear is that higher rates would mean a greater risk of the likes of Ireland and Portugal falling the same way as Greece. Like any economic announcement that creates volatility, many will likely wait on the sidelines. The euro will likely be the most volatile place after the numbers. However, a lot will depend on Trichet’s press conference and whether the recent poor readings have had a bearing on the ECB decision. Equity markets will also be a little wary ahead of any big numbers. We have already seen a degree of calm this week ahead of the key numbers today and tomorrow. However, should we get any surprises those who waited will be far better placed. Caution is definitely the way to play it when there is so much indecision.
CAXTON FX
RICHARD DRIVER
Even at these very low sterling-euro levels, I would not like to be long of sterling. Sentiment towards the UK economy has gone from bad to worse after last week’s data showed growth is stalling. We can expect another poor quarterly GDP figure, so a Bank of England rate rise this year looks very optimistic. The 0.5 per cent UK interest rate will definitely be kept on hold tomorrow, particularly in the absence of the recently departed MPC hawk Andrew Sentance.
I’d be long on euro. The ECB won’t raise rates tomorrow, but as long as Trichet adopts his “strong vigilance” rhetoric, then the euro has decent upside potential. Investors were pretty unperturbed by last week’s downtick in monthly Eurozone inflation; a reflection of their confidence that the ECB will raise rates to 1.5 per cent in July. To a large extent, a July rate rise is priced in, but the euro will no doubt enjoy a boost from hawkish remarks from Trichet.
With the worst of the Greek debt crisis seemingly behind us and a resolution in sight, euro-dollar is remarkably targeting the $1.50 level again. I see sterling-euro heading down towards €1.11 by the end of this week, and dipping below €1.10 by the end of the month. The appetite of Asian sovereign buyers for the single currency seems insatiable and as the market shifts focus from the debt crisis back to interest differentials, this is only going to favour the euro.