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About GAIN: News & Events |
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RESEARCH NOTE: Oct. 2 ECB rate decision
Brian Dolan, Chief Currency Strategist
Summary Outlook: Tomorrow, October 2, 2008 at 0745ET/1145GMT, the ECB will announce its interest rate decision and we expect rates will be held steady at 4.25%, which is also the unanimous market consensus. However, the real action will come from the 0830ET/1230GMT press briefing by ECB Pres. Trichet. In his comments, we look for Trichet to maintain his hawkish anti-inflation rhetoric (upside risks to price stability) while also acknowledging that the economic outlook has worsened (downside risks to growth). To the extent Trichet softens his inflation concerns, mostly due to lower commodity base effects, it will be seen as opening the door to rate cuts down the road and be EUR-negative. To the extent that Trichet reveals greater concern over the growth outlook, the reaction will be similarly EUR-negative. Should Trichet fail to acknowledge signs of greater economic deterioration, the market is likely to view this as a 'head in the sand' response and conclude that ECB inaction will lead to a longer and deeper growth decline, again putting pressure on the EUR.
As should be plain, we do not see any EUR-positive outcomes to tomorrow's ECB decision. The primary risk to our outlook is an extended round of EUR short-covering given the sharp declines seen in recent days.
Trading Strategy: We look to be 50% short EUR/USD going into the ECB press conference and to add to the short position on any knee-jerk EUR strength/USD weakness following the 0830ET/1230GMT release of US weekly jobless claims, which are likely to remain elevated. Given recent volatility, we look to take advantage of any rebounds in EUR/USD to sell EUR/USD at 1.4140 if seen prior to the ECB decision. Based on price levels at 0830ET, we would look to sell the remaining half of the EUR/USD short position roughly 30-50 pips higher following the release of jobless claims, but this depends on the size of the initial claims report. For example, a weekly jobless claims number greater than 500K could see a 50-80 point jump in EUR/USD, so we will be flexible. Also, there is a risk that unrelated events, such as the defeat of the US rescue package in the Senate tonight, may overwhelm this strategy, so we will be following events closely. The ultimate stop loss on the short EUR/USD position will be 1.4270. We would look to take profit on EUR/USD shorts in the 1.3800/50 area, which is the minimum measured move objective of the break of the bear flag consolidation channel earlier this week.
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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