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About GAIN: News & Events |
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RESEARCH NOTE: ECB & BOE Interest Rate Decision Preview
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Outlook Summary:
Tomorrow (Thursday, Sept. 4) both the ECB and BOE are set to announce rates. While the BOE is shaping up to be a possible non-event, the potential for further GBP selling pressure remains intact. The ECB, meanwhile, is likely to come out with a very similar statement to the prior meeting where they highlight upside risks to inflation and recognize that economic growth has shifted down a gear or two. Below is our expectation for each event and the potential currency moves.
Trading Strategy:
EUR/USD: Look to sell post-Trichet EUR/USD knee-jerk bounces as the move eventually fades with the realization that the Euro-zone economy remains on shaky ground.
GBP/USD: Look to sell GBP/USD if pair comes under pressure on steady rates and sell at best if they surprise with a cut, as it will signal 'damage control' rate cuts with more to come.
EUR/GBP: Look to enter long EUR/GBP position ahead of the rate decisions as we anticipate knee-jerk EUR buying while GBP weakness looks likely no matter the outcome. However, do take profit on EUR longs if seen, as we expect any EUR gains to be short-lived.
Analysis:
ECB: The European Central Bank is up tomorrow at 1145GMT with the usual press statement following at 1230GMT. The consensus is for the bank to leave rates on hold at the current 4.25% level. As such, the press statement will once again be in focus. Recent comments from ECB member Axel Weber that a rate cut is currently premature are likely to resonate in Trichet's post rate decision comments. That said Trichet will also have to acknowledge that economic growth has clearly slowed with 2Q GDP printing negative and paltry July retail sales -- which plunged -0.4% after slipping -0.9% prior -- suggesting no speedy recovery in 3Q. While likely to be similar to the prior press statement which harped on inflation worries and downgraded growth slightly, we would expect a potential bounce in EUR/USD if Trichet suggests rate cuts are out of the question. In this case we would look to sell post-Trichet EUR bounces as reality sinks in that the Euro-zone economy remains on shaky ground.
BOE: The Bank of England will decide on rates tomorrow at 1100GMT. The consensus here is unanimous that the bank will leave rates at the current 5.00% level. If this happens, the release will probably turn out to be a non-event as the BOE does not provide a press statement unless they make a change to rates. The meeting will likely prove to be contentious as per the latest musings from BOE member David Blanchflower who noted the very real risk of the UK plunging into a recession. Indeed he said that he expects "negative growth" for "several further quarters.'' If GBP comes under pressure despite a stand-pat stance on the part of the BOE, we would look to go with the move and short the currency as this would be an indication that GBP selling interest remains very high in the market. The idea here is that the longer the BOE leaves rates unchanged, the longer UK economic growth will suffer. While the risk of a rate cut is an extremely low probability event, this would shake up GBP in a big way. We would expect a strongly negative reaction in GBP as the market senses panic from the BOE and prices in additional rate cuts sooner rather than later.
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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Overview