ECB and BoE Preview: Any Risk of Fireworks?

Last updated 10/7/2009 10:13 AM ET (GMT -5) 4 Comments

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Kathy Lien

Director of Currency Research, GFT

With no U.S. economic data on the calendar this morning, the dollar benefited from profit taking on short positions and marginal risk aversion as concerns about commercial real estate losses in the U.S. return. The weakness in the dollar has come quickly over a short period of time and therefore a relief rally is not surprising. However the Australian, New Zealand and Canadian dollars still managed to hit fresh highs before the dollar gained traction. Nothing has changed over the past 24 hours and we continue to believe that the dollar is headed lower. The only thing that save the dollar would be supportive from central bank officials, which is a realistic risk ahead of the Eurozone and U.K. central bank monetary policy announcements.

Unlike the Reserve Bank of Australia, the European Central Bank and the Bank of England are not expected to raise interest rates. However that does not mean that no significant comments will come out of the meeting.

Monetary policy will most likely remain unchanged on Thursday, but there is a good chance that Central Bank President Trichet could reiterate his support for the dollar and the adverse impact of excess foreign exchange moves. Although this would be nothing new, it could be enough to tip the EUR/USD over. Based upon recent economic reports from the Eurozone, the recovery remains "bumpy." The expiration of the car scrapping program in Germany has driven retail sales sharply lower while his morning's Eurozone GDP report revealed that growth in the second quarter fell more than initially anticipated. Weakness in other parts of the region has offset growth in Germany and France, triggering a 0.2 percent drop in GDP. Aside from comments on the currency, the market will also be looking at what Trichet says about the economy and the results of their second one year refinancing operation which was met with lackluster demand. The question of adding a spread to the one year tender is once again an issue. If the ECB adds a spread to the December operation, it would be perceived as a hawkish move. Given the recent trend of economic data and the appreciation in the EUR/USD, Trichet may postpone this decision until November. In terms of exit strategies, ECB officials have said repeatedly that now is not the time for an exit and we expect Trichet to reiterate this stance.

Of all the major central banks, the Bank of England is the most dovish, which explains the recent underperformance of the BRitish pound. At the last monetary policy meeting, the BoE left their asset purchase program unchanged but announced that it would take another 2 months to complete which suggests that they haven't ruled out further stimulus. Changing the interest paid on bank reserve deposits was not discussed at the previous meeting and could therefore be discussed tomorrow. There has also been a lot of confusion about the central bank's stance on the sterling so if the BoE addresses this issue, it could trigger volatility in the pound. Otherwise, we do not expect anything significant from the BoE tomorrow - instead our focus will be on the ECB.

Comments (4)

FXDragon

October 07, 2009 at 05:46 PM ET

Hello,
"The question of adding a spread to the one year tender," What does this mean?

Thanks,

klien

October 07, 2009 at 05:48 PM ET

It means adding a premium to the interest rate which would be a sign that they are beginning to unwind their ultra easy policies

pal investments

October 07, 2009 at 02:06 PM ET

we'll be looking for a EUR/ USD bouncing off main support ( bullish trend) tomorrow morning, do you think, that is likely to happend? or dolar could gaing strength for that news release and break support? i thinkk that until we don't have any dosmestic ( important) news release, the dollar will keep losing in the long term, with some pull backs in the short term....i am looking foward to se a dolar breaking the year high and heading to 1.50, 1.52.....what do you think? thanks

klien

October 07, 2009 at 05:37 PM ET

Unless the ECB makes some dollar supportive comments, which they could, the dollar is headed lower

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.