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Research Note: FOMC, BOE and ECB Rate Decisions
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
On Wednesday, November 4 at 1400EST/1900GMT the US FOMC will announce its interest rate decision and issue a statement on the outlook for monetary policy and the economy. On Thursday, November 5 at 0700EST/1200GMT the Bank of England will announce its rate decision, followed by the ECB rate announcement at 0745EST/1245GMT and ECB Pres. Trichet's press briefing at 0830EST/1330GMT.
Summary Outlook:
FOMC: We and the market expect the Fed to hold rates steady at 0.0-0.25% level and do not expect any material changes to their economic assessment or the outlook for monetary policy. To the extent that markets are fearful the Fed will drop the "...exceptionally low levels of the fed funds rate for an extended period" language, potentially signaling an earlier move to tighten rates, its retention may be a positive for risk sentiment and a negative for the USD. However, the degree of cautiousness in the Fed's economic outlook will also be important for market sentiment. Any new expressions of concern may see any rally in risky assets subsequently stall and reverse. Also, while we consider it of low probability, the Fed may decide to voice support for the USD in light of increasing international concern over its recent weakness.
BOE: We and the market expect the BOE to hold rates steady at 0.50%. The focus will be on any increase to the BOE's asset purchase facility (APF), currently at GBP 175 bio. Following the disappointing 3Q GDP report two weeks ago, speculation has built that the BOE will expand the APF by either GBP 25 or 50 bio., with the median forecast at 50 bio. We think an increase of GBP 25 bio is already priced into Cable (last around 1.6400), so an APF increase of only 25 bio may see GBP gain as shorts are covered. A larger 50 bio increase would likely see GBP decline further, while no change to the APF would likely see Sterling rally strongly.
ECB: We and the market expect the ECB to hold rates steady at 1.00% and to issue a similar outlook as the October assessment. The area where the ECB may make changes is by discontinuing the 12-month unlimited cash tenders to banks in light of further financial sector stabilization and lower demand at the last tender. Such a move would likely be taken as a vote of confidence in the banking sector and could trigger gains in risk assets, potentially boosting the EUR in the process. However, any positive EUR reaction could be limited by comments from Trichet opposing further EUR strength/USD weakness. Currency comments are most likely to come in the Q&A portion of Trichet's press briefing.
Trading Strategy: Given the time horizon of the central bank meetings over the next 48 hours, it's beyond this note to offer concrete trading strategies ahead of the events. However, we would note the overall context of a pullback in risk assets (stocks/commodities) and a modest recovery in the USD. At this writing (Tuesday afternoon EST), that pullback in risk/USD rebound is showing signs of pausing. We still view the risk environment as overextended and likely to correct further in coming weeks, and thus our preference is to re-buy USD on any weakness following the central bank decisions. We think the EUR/USD 1.4850/1.4900 offers a good selling opportunity, with a relatively tight stop loss at 1.4950/60. Keep in mind the G20 is meeting this weekend, and USD weakness is likely to be a topic of discussion. We think the G20 could be a USD positive event and prefer to be long USD going into the weekend.
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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