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Research Note: October Bank of England and ECB Rate Decisions
Brian Dolan, Chief Currency Strategist
Summary Outlook: On Thursday, October 8, at 0700EDT/1100GMT the Bank of England (BOE) will announce its interest rate decision, followed by the European Central Bank (ECB) at 0745EDT/1145GMT.
For the BOE, we and the consensus do not expect any change to rates (currently 0.50%) or to the amount of the BOE's asset purchase target (GBP 175 bio). There is a small potential that the BOE might reduce the amount of interest it pays banks on reserves, which would be taken as an easing and would likely see GBP weaken. Should the BOE make zero changes, GBP has modest potential to strengthen as short-GBP positions on event-risk are covered.
For the ECB, we and the consensus also expect no change to base rates (1.00%) and no additional modifications to ECB policy, leaving Trichet's 0830EDT/1230GMT press conference as the most likely catalyst for any market reaction. Trichet may note improved financial conditions in light of lower demand at the ECB's recent 12-month tender, but he will also likely retain an extremely cautious bias on the overall economic outlook despite some recent data improvements. The most important issue for FX markets will be what Trichet has to say on USD weakness/EUR strength. If he stays with his recent rhetoric, basically noting that the US supports a strong USD, the market may interpret it as empty concern, potentially sending the EUR higher. If, however, he shifts the focus onto undesirable EUR strength and its negative implications for Eurozone growth, which he has lately evoked, markets may take it as a more meaningful signal of activist ECB intentions. The more blase Trichet is, likely the better for EUR/USD; the more strident he is, likely the worse for EUR/USD.
Trading Strategy: US weekly jobless claims at 0830EDT/1230GMT will be another ingredient in the mix tomorrow morning, along with whatever global stock indexes are doing in the wake of initial US 3Q earnings reports. GBP/USD is currently trading just above key 1.5750/80 support levels, and a break below would suggest fresh sterling weakness against both the USD and EUR. We would note a potential H&S pattern in daily GBP/USD, and a break below the neckline at 1.5750 may augur significant weakness. 1.6050 looks to be the key to stronger GBP/USD. EUR/USD is similarly trading mid-way between recent highs/lows at 1.4850/1.4450, with 1.4630/50 looking to be the pivot between the upper and lower ends of that range. We'll stay with overall range expectations unless Trichet overtly threatens action on the EUR and prefer to fade tests of recent ranges (selling into strength/ buying into weakness) with 30-point stops above below the range levels outlined above. If Trichet begins pounding the table, we'll be ready EUR/USD sellers, but become extremely protective if price sees below 1.4500.
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.
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