Euro Open: All Eyes On the Bank of England

[DailyFx]

Economic data surprised the markets overnight as both Japan and Australia issued higher-than-expected readings for inflation and employment, respectively. The highlight of the forthcoming session will no doubt come with the Bank of England’s Rate Decision as Mervyn King and company are asked to make a precarious judgment call favoring either economic growth or price stability.





Key Overnight Developments

• Japanese Corporate Prices Soar, BOJ To Keep Rates On Hold Anyway
• Australian Employment Spikes Up on Mining Boom, Reverses May Losses


Critical Levels




The Euro eased lower toward the 1.57 level overnight following a strong rally in the US session. DailyFX Technical Analyst Jamie Saettele reports that the downward correction may be over, with the pair turning upward to target resistance at 1.5900. A further downside breach eyes support at 1.5534. The sterling held near US session highs, oscillating in a 34-pip range above the 1.98 mark. Support remains at 1.9648, while resistance stands at 2.0175.


Asia Session Highlights




Japan’s CGPI Index exceeded expectations, printing at a 27-year high of 5.6% in the year to June versus expectations of 5.3%. The metric measures price growth for goods purchased by Japanese corporations. Predictably enough, most of the rise was driven by booming commodity prices. Companies pass on these cost increases to consumers by raising the price of finished products, bidding up the overall inflation rate. That said, the Bank of Japan is unlikely to raise rates in the near term. Core CPI is rising far slower than that of Europe or the US, while wages rose just 0.2% in May, the slowest in a year. This gives the Japanese policymakers more room to maneuver than most of their counterparts across the G10. May’s Current Account surplus narrowed, albeit less so than expected. The rising price of oil was the culprit here as well, pushing up valuation of import volumes. The market’s response to the releases was fairly muted: USDJPY rose 20 pips but returned the gains within an hour.

Australian data dominated price action once again as June’s Employment Change data surprised substantially to the upside, showing the economy added 29.8k jobs versus the expected 10k. The reading reversed last month’s loses, revised down to -25.6K. China’s insatiable appetite for Australia’s coal and iron ore exports has fueled a boom in the mining sector with employers rushing to expand capacity (both labor and otherwise) to meet demand. Traders rewarded the positive result as AUDUSD jumped 68 pips higher within 20 minutes after the release.

Kiwi data broke with the session’s theme as the Business NZ Purchasing Manager Index failed to surprise, showing business sentiment declined further in June with a reading at 45.7 versus 47.9 in the preceding month. The result fits within broad expectations of economic slowdown for the smaller antipodean nation.


Euro Session: What to Expect




The European portion of today’s docket sees things quiet down a bit following yesterday’s data overload. Both France and Italy will issue May Industrial Production figures. Monday saw the analogous release from Germany decline to 7-year lows. Booming energy prices have hurt manufacturers from two angles, raising production costs and crimping domestic demand by eating into consumers’ disposable income. The stronger Euro sours prospects further, making European exports comparatively more expensive than the competition. France and Italy are likely to follow along the same trajectory as neither seem better suited to deal with the aforementioned roadblocks than their German neighbors.

The highlight of the session will no doubt come with the Bank of England’s Rate Decision as Mervyn King and company are asked to make a precarious judgment call favoring either economic growth or price stability. As our own Terri Belkas has pointed out, the BOE’s officially stated dual mandate means they are unlikely to tighten policy as the economy teeters on the brink of recession. To that effect, the bank will try to steer price level expectations lower by talking up their inflation-fighting credentials but fall short of actually delivering a rate hike.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.