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About GAIN: News & Events |
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RESEARCH NOTE: June 4 BOE and ECB Interest Rate Decisions
Brian Dolan, Chief Currency Strategist
Summary Outlook: The BOE is likely to announce a steady interest rate (0.50%) decision tomorrow at 0700EDT/1100GMT. Traditionally, the BOE does not issue a statement when policy is unchanged, so we may not hear anything more from them. At the last meeting, the BOE announced that it was employing a second tranche of their asset purchase facility and extending its duration, so a further announcement there seems less likely.
The ECB rate decision at 0745EDT/1145GMT seems similarly uneventful, with market consensus firmly expecting a steady 1.0% benchmark interest rate. However, ECB Pres. Trichet will hold the usual press conference at 0830EDT/1230GMT and we think his commentary could provide some negative EUR implications. At the last press conference, Trichet indicated that 1.00% was not necessarily a floor for interest rates, meaning the risk of any change to interest rates is for a rate cut. Trichet also indicated that the ECB would reveal the details of the EUR 60 bio covered bond purchase program announced last month. Given the relatively small size of the ECB's asset purchase plan relative to US and UK efforts, we don't think the EUR should suffer on the mechanics of the operation.
However, in terms of the Eurozone economic outlook, we think Trichet could display a more downbeat outlook than what markets have recently been pricing in. Trichet will likely note stabilization in recent data, but then focus more on the weak outlook for the rest of the year, potentially reviving talk of additional rate cuts ahead. Additionally, given the sharp increase in the EUR since the last ECB meeting, Trichet is likely to be queried on EUR strength/USD weakness in Q&A. We would look for him to defer to the G7 language and note that the US supports a strong dollar, which might add to current pressure on the EUR. Should he elaborate further on EUR strength, it will likely be a stronger message of displeasure on EUR strength. A stronger EUR may hamper an economic recovery by undermining export competitiveness, while also aggravating deflationary fears for the Eurozone, developments Trichet should be keen to avoid. As a result, we expect Trichet to remain dovish on the outlook and potentially highlight the risks posed by a strengthening EUR.
Trading Strategy: Wednesday saw a major rebound in the USD and a sharp decline in the EUR/USD rate to near the key 1.4100 level, so a fair amount of EUR selling has already happened and we would be reluctant to sell at current levels. However, selling rebounds in to the 1.4200/50 area looks to be attractive, with a stop over the recent high at 1.4340. A drop below 1.4100 will likely see to 1.4000 initially.
A more attractive option at current levels (0.8690) may be to sell EUR/GBP on the view that Eurozone underperformance relative to UK stabilization will see the cross move lower. We think the 0.8700/50 area offers a good selling opportunity, with a stop at 0.8810 and a target at 0.8550/80. The risk is that the current USD rebound intensifies, leading to a more rapid decline in GBP/USD relative to EUR/USD, overwhelming EUR/GBP fundamentals and squeezing the pair higher.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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