Currency Chat

[buyittradeit]

Summary Outlook: At 0700EDT/1100GMT Thursday, the Bank of England is likely to announce a steady interest rate decision, keeping base rates at 0.5%, in which case it traditionally does not issue any other statement. We think the BOE rate decision will be a non-event.

At 0745EDT/1145GMT, the ECB is expected to cut rates 25 bps to 1.00%, which the market has fully factored in. The key to the ECB decision, however, is likely to come at the 0830EDT/1230GMT press conference, where ECB Pres. Trichet may announce additional 'unconventional easing' policies, though we cannot rule out that any such announcement may accompany the earlier interest rate decision.

The outlook for additional 'unconventional easing' is exceptionally mixed. At his last press conference, Trichet promised an important 'rendezvous' at Thursday's press briefing, but comments from ECB officials in the interim suggest significant disagreement among Governing Council members, such that consensus may not be reached on additional measures. We see three main potential outcomes for additional unconventional easing measures, with equal weighting as to their likelihood. In our first scenario, if no additional measures are announced, we think the EUR will benefit across the board, potentially sharply, as fears of any monetary debasing are allayed. In our second scenario, if the ECB simply extends the term of interbank financing it has already made available (e.g. from 6-12 months or beyond), we would expect a positive EUR reaction on a similar basis as the first scenario, but perhaps more subdued. In the third scenario, if the ECB announce some form of direct asset purchases (quantitative easing), such as buying government or corporate debt to drive down lending rates, we would look for a negative EUR reaction, potentially sharply so, as the broader value of the EUR would be seen to be undermined.

If the potential outcomes of the unconventional easing debate are not complicated enough, we also have to contend with what the ECB actions suggest for the broader Eurozone economic outlook. If the ECB pursues a more limited policy shift as suggested in the first two scenarios, the lack of decisive action by the ECB may be seen as consigning the Eurozone to a longer and deeper recession, ultimately limiting any gains in the EUR, but not before a potentially significant move higher. Trichet's economic assessment also poses risks, as does the possibility he may signal that 1.00% is not necessarily a floor for rates.

Trading Strategy: In light of the variety of potential outcomes from the ECB, we expect intense volatility following the ECB announcements. If the ECB abstains from quantitative easing (Scenario 1 or 2 above), we think the EUR could extend recent gains and we would abandon the Weekly Strategy posted May 5. The first challenge comes in the 1.3450/1.3500 area, just above the highs so far at 1.3440 and containing the 200-day moving average at 1.3481 (likely a touch lower by tomorrow). Strength beyond 1.3500 may open up a test of trend line resistance from the 1.6030/40 all time highs, which will be at 1.3540/45 on Thursday. Strength above that level then brings the year's highs at 1.3740/50 into view. If the ECB announces some form of quantitative easing (Scenario 3), we would expect to see a rapid fall in the EUR. On the downside, key levels we will be watching are 1.3200/30 (Ichimoku Kijun and Tenkan lines), 1.3098 (Ichimoku cloud bottom) and 1.3000/20 trend line support from the 1.2450 lows.


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.