In his comments, following the European Central Bank interest-rate decision last Thursday, ECB president Jean Claude Trichet re-calibrated recent speculation for rate hikes from the ECB. The markets were interpreting recent inflation data and comments from the ECB as significant enough to eventually lead to the ECB raising rates sooner than expected.
This speculation (for sooner ECB rate hikes) led EUR/USD to highs of 1.3862 a day prior to the ECB news conference. As was widely expected the ECB kept interest rates on hold, however the real interest was for the talk about inflation.
Mr Trichet did re-acknowledge short-term inflationary pressures; he added however that short-term inflation should remain in check over a “policy relevant horizon” and that medium to long-term inflation expectations remain “firmly anchored”. These words dampened investors’ high expectations of ECB rate hikes coming so soon.
We must remember that the ECB’s prime goal or mandate is to maintain price stability, targeting levels not more than two per cent; this explains the recent heightened focus on inflation. The European Central Bank may cure rising inflation by tightening or in simple terms by raising policy rates to mop up circulating liquidity. Raising rates is usually positive for the currency because investment flows tend to go where yields are better.
For the former part of the week, at the time of writing, EUR/USD has been trading in the range of 1.3508-1.3666. RTFX Trader Tip’s look ahead for this week sees the current Elliott wave (started at 1.3862 –February 2 highs) projected lower to levels around 1.3484/1.3467 area if 1.3725/13785 keeps offering resistance to EUR/USD trading. However if the pair manages to clearly break 1.3982, this would be a clear sign of bullishness.
US data released last Friday saw non-farm payrolls coming out much lower than expected at 36’000 against an expected 145’000 and a previous 103’000; Private payrolls increased by 50’000 but was much lower than the expected 155’000.
To compensate for these lower than expected figures manufacturing payrolls were up 49’000 against an expected 9’000 and even the US unemployment rate for the month of January came out at nine per cent, better than the expected 9.5 per cent.
Analysts still see the possibility of further US dollar weakness on the grounds that several central banks from around the world have been keeping their interest rates on hold on the back of uncertainty over US growth.
Now as US data keeps lighting hopes for the future of the world’s largest economy we are likely to see these central banks tightening ahead of the Federal Reserve, and thus giving their respective currencies an advantage stemming from rate differentials against the US dollar.
The British pound is only up a marginal 0.31 per cent, against the sum of its major counterparts, for the month of February to date. From a weekly perspective the GBP was down -0.18 per cent, for the former part of the week, against the sum of its major counterparts.
Against the euro the British pound traded in the range of 0.8389 – 0.8488 earlier this week, with the EUR/GBP rising to new highs at the time of writing. Seen against the US dollar the GBP/USD traded in the range of 1.6067 – 1.6186 for the first part of the week, making new lows at the time of writing.
On the economic docket for today we have industrial production figures and manufacturing production figures from the United Kingdom. Later in the afternoon an interest rate decision is due from the Bank of England, rates are expected to remain unchanged at 0.5 per cent.
Expectations of higher interest rates, sooner than expected, keeps lending support to the British pound – even the better PMI data issued last week gave some optimism on the prospects of UK economic growth. Inflation remains in check however with investors eyeing next week’s quarterly BoE inflation report to see if inflation remains stubborn.
A 25bp increase in China’s interest rate Tuesday morning sent the Aussie one per cent lower, against the sum of its major counterparts, for the day. Chinese tightening triggered fears of slower demand coming from the world’s second largest economy. This move comes as China intensifies its efforts to combat inflation. China is a major buyer of Australian commodities.
Upcoming FX key events:
Today: UK BoE Interest Rate Decision, Asset Purchases Target & Production data, Swiss CPI & US Federal Budget.
Tomorrow: German CPI, UK PPI & US Preliminary Michigan Consumer Sentiment.
FX technical key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.9200, key reversal point 1.0000.
AUD/USD is bullish, target 1.0300, key reversal point 0.9500.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.