The euro faces an interest rate decision today

So far this week EUR/USD has traded in the range of 1.4153-1.4268. Ahead of us today we have the ECB interest rate decision at 13.45CET and the ECB president will be giving his customary news briefing conference at 2.30 p.m.

Markets have been pricing in the possibility of a 25bp rate hike as early as this week, and on the back of these expectations the euro has managed to shrug off downgrades to Ireland and Portugal last Friday.

Throughout last week the EUR/USD currency pair was supported around the 1.4020-1.4050 region – the single currency defended well the 1.40 levels against the USD.

Towards the end of last week German retail sales for the month of February came in lower but the euro remained largely unaffected. German registered unemployed fell by 55,000 during March, beating forecasts and also the previous reading. A higher reading for euro yearly CPI estimate however lent some support to the Euro given the prevailing rate-hike expectations and their relation to inflationary pressures.

US payrolls data reported last Friday were encouraging as figures for non-farm and private payrolls came in well above expectations and the unemployment rate for March inched slightly lower to 8.8 per cent from a previous and expected 8.9 per cent. Payroll data is reported monthly every first Friday of the month.

Improving payrolls data bodes well for the US economic recovery and continues to add on to recent optimism seen in the more hawkish (or rather prone-to-normalisation) comments by some regional Fed presidents. However, Friday’s dovish comments from New York Fed president William Dudley suggest that we should not be led to think that the Federal Reserve could be unwinding its easing policy so fast. Mr Dudley emphasised that despite the better overall data the US unemployment rate is still far too high.

Even Federal Reserve chairman Ben Bernanke sounded rather dovish Monday of this week when he attributed inflationary pressures primarily to rising commodity prices and dismissed these as “transitory” and thus unlikely to persist – leading forex players to believe that he does not intend to interrupt QE2, the Fed’s last asset buying programme. However the recent hawkish comments do show some members are starting to lean towards normalisation of policy.

At the time of writing the GBP is up a total of 4.82 per cent against the majors on renewed optimism for the British economic recovery after PMI services data published Tuesday of this week came in significantly higher than expectations and in fact marked 13-month highs for the services sector. For the former part of this week the GBP was up 0.73 per cent against the USD and up 1.11 per cent against the euro.

Speculators expect the BoE may be hiking rates in June and positive UK data that comes out will reinforce such expectation, but when the data does not bode well for UK economic growth then the opposite happens and we usually see the GBP correcting lower. BoE interest rate decision is due today.

In the current week we see the EUR/GBP currency pair facing resistance to the upside in the 0.8868 to 0.8911 region while to the downside the pair should find support around the 0.8768 to 0.8710 region.

The RTFX market trend for the commodity bloc currencies (CAD, NZD and AUD) remains bullish when seen against the JPY. Commodity currencies are getting support from the overall rises in commodities and the resilience in the prices for the latter.

The CAD is also getting support from a general improvement in US data and the Fed’s recent comments pointing towards an eventual normalisation of policy – we must remember Canada’s close ties with the US.

Apart from the concerns over the recent disasters and the problems faced at the Fukushima Nuclear plant the JPY has been dragged lower by the G7’s commitment to currency intervention towards mid- March. However, the Japanese yen is also on the losing end in terms of rate differentials when compared to the ECB, FED, and BoE and twinned to risk appetite this may further encourage carry trades by using the JPY to fund money flows into the “riskier” commodity bloc currencies.

The JPY lost 3.34 per cent to the USD throughout last week. For the former part of this week the USD/JPY traded in the range of 83.86 to 84.48 so far. To the upside the pair should find resistance in the 85.45 to 86.80 region throughout the current week. While to the downside the pair should find support in the 82.03 to 79.96 region.

Upcoming FX key events:
Today: ECB Interest rate decision, BoE Interest rate decision and Asset Purchase Target.
Tomorrow: German Imports and Exports, UK PPI and Canadian Unemployment.

FX technical key points:
EUR/USD is bullish, target 1.45, key reversal point 1.3428.
EUR/GBP is neutral.
USD/JPY is bullish, target 88.00, key reversal point 81.5.
GBP/USD is bullish, target 1.65, key reversal point 1.5800.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on [email protected].

RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

Mr Muscat is senior trader at RTFX Ltd.


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