[B]Talking Points
• Japanese Yen: Rebounds above 104.00 after European equities firm up
• New Zealand Dollar: Hurt by very weak employment data
• Euro: Bounces Ahead of the ECB after breaking 1.5300 on FT article
• Pound: Hovers near 1.9600 as traders expect no change from BoE
• US Dollar: Weekly jobless claims on tap[/B]
GBPUSD rose above the 1.9600 figure in immediate aftermath of the BoE rate announcement as UK monetary authorities stuck to their script and kept rates steady at 5.0%. Following yesterday’s weaker than expected Industrial Production data, we speculated that “the last bastion of strength in the UK economy (manufacturing) may have given way, increasing pressure on the BoE to begin easing sooner rather than later despite lingering concerns about inflation amongst most of the MPC members.”
Nevertheless, Mr. King and company chose to err on the side of inflation and as usual produced no statement, leaving traders in the dark as to the composition of the vote. The markets will get more clarity in two weeks when the MPC minutes are released, but in the meantime sterling saw little support from BoE move as the unit sold off for more than 50 points in the first 15 minutes of trade after the news. Given the lackluster economic data from UK, most currency traders are anticipating more easing from the BoE as the year progresses and unless UK economic fundamentals suddenly improve the pressure on cable will remain.
Meanwhile, the EURUSD went on a rollercoaster ride in a typically quiet Asian session after an FT article noted that “senior officials” in US and Europe now have a united desire to see the dollar strengthen against the euro. Euro tumbled below the 1.5300 figure before recovering in early European trade on short covering and better carry-trade flows.
After dropping in a near straight line for the past two weeks, the EURUSD may find some temporary support at the 1.5300 level, especially if Mr. Trichet continues to pursue his hawkish rhetoric at today’s post rate announcement conference. The ECB does not like to surprise the markets, so currency traders will watching carefully for any change of tone in Mr. Trichet’s commentary to determine if the ECB chief will lay the groundwork for a change in monetary policy from hawkish to neutral. If Mr. Trichet continues to focus on price pressures then the possibility of any rate cuts in the near future will be remote and EURUSD could rebound strongly for the rest for the day. However, if Mr. Trichet begins to acknowledge the growing evidence of slowdown in the EZ economy, the pair could retest its daily lows as traders start to price in the new easing regime.
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