|
|
 |
 |
|
RESEARCH NOTE: Bank of England & European Central Bank Decision Preview
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook:
(Wednesday August 6, 2008) We look to be short EUR/USD going into the decision/press conference and to add on bounces into the 1.5450/80 and 1.5500/30 areas. Both the BOE and ECB are likely to keep rates on hold, which is the consensus market view. If the BOE makes no change to the 5.00% benchmark rate, they traditionally do not issue a statement, so a steady BOE decision may be a non-event. The ECB will issue a statement, with M. Trichet reading this and answering questions at the 0830ET/ 1230GMT ECB press conference. We expect Trichet to acknowledge the sudden sharp deterioration in the European growth outlook, but also retain a hawkish tone on inflation and indicate that current rates are appropriate, suggesting interest rates are on hold for the foreseeable future. We would hope that hawkish inflation-talk might provide a bounce in EUR/USD to sell on, but even that may not materialize. The risks are that Trichet softens the inflation rhetoric alongside the weaker economic outlook and EUR/USD keeps moving directly south. We think there is potential for an imminent death spiral in EUR/USD, potentially taking out the 1.5270/5320 key lows for the year and targeting another -750 pip decline in coming weeks.
Trading Strategy:
EUR/USD: We look to establish short EUR/USD positions in the 1.5450/80 area and to add on any bounces, ideally selling in the 1.5500/30 area; stop over 1.5600. Take profit objectives are for a portion at 1.5300/30 and the remainder in the 1.5000/50 area.
GBP/USD: We look to sell GBP/USD between 1.9500/30 and add to the short between 1.9560/90; stop over 1.9670. Take profit objectives are for a portion around the lows for the year at 1.9320/50 and for the remainder near the 1.9150/80 lows of March 2007.
Analysis:
Since the ECB is the only central bank likely to issue a statement tomorrow, we'll focus primarily on the ECB and EUR/USD outlook. Traditionally, when the BOE holds rates steady, it does not issue a statement.
Economic data in the UK and Eurozone have all deteriorated sharply in recent weeks making 2H 2008 recessions in both areas a real likelihood. At the same time, though, inflation rates are running at extreme levels in both areas, leaving both the ECB and BOE handcuffed in lowering interest rates to offset economic weakness. For the ECB, the extent to which Trichet acknowledges the recent erosion in the economic outlook will be critical to interest rate expectations. With Eurozone CPI rates running at 16 year highs, it seems likely that Trichet will continue to pound the anti-inflation drum and vow to do "everything necessary" to anchor inflation expectations and ensure price stability. If delivered, we would hope for some bounce on which to sell EUR/USD, as we expect the next ECB move to be a rate cut, and the longer ECB rates are maintained at current levels, the further the outlook will deteriorate. At the same time, the recent sharp declines in commodity prices open the door for Trichet to acknowledge an ebbing of inflation risks and suggesting that current rates are appropriate and are unlikely to move higher. That amounts to taking further rate hikes off the table. Should he go one step further and indicate that the June rate hike might now not be needed, he would be suggesting that the next move would be a rate cut. We think such an indication would initiate a sharp sell-off in EUR/USD, very likely leading to a quick drop below the year's lows in the 1.5270/5320 area.
Technically, the 1.5270 level represents the neckline of a 'double top' chart formation. A break below that level would validate the formation and target a 'measured move' objective of approximately -750 pips lower (the distance between the neckline (1.5270) and the double tops (avg. 1.6030) measured from the neckline.
Sharp declines in oil prices are also a EUR/USD negative and that spiral continues to unravel in rapid fashion. An acknowledgement by the ECB of a potentially recessionary slowdown in Europe would spur further oil losses as demand would be expected to drop further, fueling further losses in both prices.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
|
|
 |
|
