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Central Bank Week - What Does it Mean for FX?

Last updated 11/3/2009 9:49 AM ET (GMT -5) 5 Comments

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Boris Schlossberg

Director of Currency Research, GFT

With three central bank meeting scheduled for the next 48hours we thought it worthwhile to examine the key issues facing monetary authorities in each region and speculate on the possible impact on FX of their respective policy decisions.

The Fed.

The Fed will release its rate decision at 19:15 GMT on Wednesday November 4 ^th and it is universally expected to maintain the Fed Funds rate at the record low of 25 basis points. In fact, the markets are not pricing in any potential tightening until Q2 of 2010. However, as always, traders will try to deconstruct the wording of the FOMC statement with the zeal of Kremlinologists. The critical focus will be on the following phrase, ““keeping rates exceptionally low for an extended period”. Some analysts have predicted that the Fed will remove the word “extended”, signaling to the market that it is laying the groundwork for possible normalization of monetary policy in 2010.  

The Fed has never raised rates until the unemployment rate has peaked and therefore remains constrained in its policy options by the difficult labor conditions extant in the US economy.  However, the latest data from ISM manufacturing report suggest that layoffs may be coming to an end, and while job growth remains elusive for the time being, the Fed may conclude that labor conditions have stabilized, obviating the need   for ultra accommodative monetary policy going forward. Furthermore, the mere removal of the word “extended” will not obligate FOMC officials to any immediate course of action, but may provide some support to the dollar at a time when many US trading partners have expressed serious concern over the weakness of the currency.  If the Fed does adopt a more hawkish posture, most likely the bullish impulse will be best expressed through USD/JPY pair  which could rally significantly on divergent interest rate expectations.

The BOE

Will they or won’t they will be the key question facing  currency markets  when BOE makes its announcement November 5 ^th at 13:00 GMT. Will the MPC increase the current quantitative easing program  by yet another 50 billion pounds to take it to 225 Billion? With UK government placing another $51 Billion into UK banks overnight,  the pound could see further selling pressures if Mr. King and company consider additional  monetary measures.   

The eco data from UK has been decidedly mixed with GDP contracting for the sixth straight quarter in a row  but the latest PMI Manufacturing figures showing the best reading in more than two years. Tonight’s PMI Services report may provide some clues  to the direction of the MPC policy decision, but the bottom line is if UK monetary authorities decide to expand the program beyond its current status cable is likely to weaken especially against the euro, with EUR/GBP once again bouncing off .9000 support. On the other hand if BoE signals a moratorium on further QE initiatives, the pound should outperform especially if   the UK PMI Services data tonight shows continued expansion of eth sector.

The ECB

The ECB is perhaps the most inscrutable of central banks this month, as it tries to walk a fine line between defending it mandate for price stability without further aggravating the already elevated EUR/USD exchange rate. President Trichet is likely to repeat many of his favorite themes, noting that central bank expects labor condition to remain challenging and growth below trend in the immediate future. 

Nevertheless, employment prospects in the region have been surprisingly robust with German unemployment declining  for the fourth consecutive month. Despite clear evidence of stabilization,  market expectations of ECB remain placid with no rate hikes anticipated    until H2 of 2010. The primary reason? Higher euro exchange rate has offset any price pressures  in the region with tonight’s PPI data expected to decline by -0.4% on a month over month basis and -7.1% from this period a year prior confirming the deflationary trend. Thus, unless Mr., Trichet surprises the market with  some hawkish rhetoric , the ECB press conference is likely to be the least market moving of the three remaining central bank events this week.

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Comments (5)

FXDragon

November 03, 2009 at 02:52 PM ET

If fed started raising rates, would you expect us stocks to go down with eurusd? Also, are you saying ecb is happy with deflation? I thought they would want some inflation to confirm consumer spending.

bschlossberg

November 03, 2009 at 04:34 PM ET

No I meant that they will no make any hawkish noises because EZ is still in deflation and they do not need to worry about price stability

Wanna Be

November 03, 2009 at 04:10 PM ET

When the RBA raised their rates another .25 I thought the Aussie/Usd would have jumped alot more than it did. I thought it would of sailed back up to .9200 or so. But it appears that the FX market was not to excited about it. Could you explain why the reaction was somewhat muted?

bschlossberg

November 03, 2009 at 04:33 PM ET

Because they indicated that they may wait until next year to raise rate further. This hike was already priced in

Dario Fuentes

November 03, 2009 at 05:16 PM ET

Im my opinion, as long as the risk apetite comes back to action the Assie should be the currency that rally the most. I am still bullish in AUD/USD and can consider that easily can reach 0.95 before the year ends. I am also bullish on AUD/JPN. We need some good news supporting the US and global economy recovery

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.