Euro, British Pound, Australian Dollar All to Face Rate Decisions - Who Will Cut?

The euro, British pound, and Australian dollar will encounter rate decisions from the European Central Bank, Bank of England, and Reserve Bank of Australia this coming week, but only one is expected to reduce rates. Meanwhile, the US dollar will face ISM Non-Manufacturing and non-farm payrolls (NFPs) and the Canadian dollar will see their own employment figures hit the wires.

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[li][B]Reserve Bank of Australia Rate Decision – May 5[/B][/li] The Reserve Bank of Australia is anticipated to leave their cash rate target unchanged at 00:30 ET on Tuesday, after surprisingly cutting the rate by 25 basis points to 3.00 percent, but the Australian dollar may only respond to a surprise rate cut or a biased monetary policy statement. After the central bank’s last meeting, RBA Governor Alan Bollard said, “The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead,” suggesting that further reductions were unnecessary. As a result, it will be important to look to Bollard’s statement, as signs that the RBA may consider cutting the cash rate target again eventually could weigh on the Australian dollar, while indications of a broadly neutral bias could support the currency.
[li][B]US ISM Non-Manufacturing (APR) – May 5[/B][/li] Conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to have improved somewhat in April as the Institute for Supply Management index is estimated to rise to 42.0 from 40.8. Indeed, consumer confidence has shown emerging optimism, primarily on the economic outlook, as the Conference Board’s measure rocketed to 39.2 from 26.9 and the University of Michigan’s sentiment report rose to 65.1 from 57.3. Since risk trends have proven to be the greater driver of price action in the forex markets, a weaker than expected result could trigger flight-to-quality and thus, gains for the US dollar. On the other hand, evidence suggests we could see a surprisingly strong result, which could boost equities and weigh on safe-haven assets.
[li][B]Bank of England Rate Decision – May 7[/li] [/B]The Bank of England is expected to leave rates unchanged for the second straight month on May 7 at 7:00 ET. Indeed, both Credit Suisse overnight index swaps and a Bloomberg News poll of economists reflect forecasts that the BOE will leave the Bank Rate at an all-time low of 0.50 percent at 7:00 ET on Thursday. A look at the minutes from their April policy meeting showed that the MPC voted unanimously in favor of leaving the Bank Rate at 0.50 percent and to continue their quantitative easing (QE) program. They also said that there was a “high degree of uncertainty” over the amount of asset purchases that would be necessary to keep inflation at target, and if “the evidence warranted it,” the Committee could reduce or expand their program. Ultimately, how the British pound responds will likely depend on the BOE’s QE stance. Signs that the BOE may increase their gilt purchases could weigh heavily on the British pound, especially against the euro, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency.
[li][B]European Central Bank Rate Decision – May 7[/B][/li] According to a Bloomberg News poll of economists and Credit Suisse overnight index swaps, the ECB will cut rates by 25 basis points to 1.00 percent on Thursday morning. A reduction in line with Bloomberg’s estimates could exert bearish pressures on the euro, but where the currency ends the day may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Many ECB members have indicated that they will announce “unconventional” measures following this meeting, which many have taken to mean credit easing, and if Trichet makes such an announcement, the euro could tumble. On the other hand, if the ECB leaves rates unchanged, indicates that they have no intention of bringing interest rates lower in the near term, or if they put off credit easing, the euro could rally.
[li][B]Canadian, US Employment Reports (APR) – May 8[/B][/li] At 7:00 ET, the Canadian net employment change is forecasted to have fallen by 50,000 during April, marking the sixth straight month of job losses. Furthermore, the unemployment rate is anticipated to have risen to match July 1998 high of 8.3 percent from 8.0 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.

 Though not always a reliable market-mover, the 8:30 ET release of US NFPs is sure to garner a lot of attention as the report is forecasted to show that the economy lost 610,000 jobs in April. This will mark the sixteenth straight month of job losses and the sixth month in which job losses amounted to more than 500,000. Adding to the mix, the unemployment rate is anticipated to surge to 8.9 percent - the highest since September 1983 - from 8.5 percent. Based on the fact that continuing jobless claims have done nothing but hit record highs, there is some potential for worse-than-expected results on Friday. However, NFP’s would probably have to drop more than 700,000 or the unemployment rate would have to break above 9 percent in order to evoke much of a reaction from the markets. 

[/ul] [B]See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
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