Daily Report: Volatility Builds Up Ahead of ECB & BoE

Volatility continues to build up as markets are preparing for BoE and ECB rate decisions today. The Japanese yen is stealing the show again, strengthening across the board as investor's sentiments reversed again. NZD/JPY sees the sharpest move today so far after Q1 employment dropped sharply by -1.3% qoq with unemployment rate edged higher to 3.6%. Aussie has seen much weakness to after unemployment rate climbed from 4.1% to 4.2% in Apr even though job gains beat expectation by growing 25.4k. Swiss unemployment rate is unchanged at 2.6%. Euro is pressured after a Financial Times report said US and EU are united on stronger dollar.

The Euro dives through 1.5342 support against the greenback and gives most of the earlier recovery against Sterling today. ECB is widely expected to be on hold at 4.00%. Recent data saw Apr HICP flash which moderated from 3.6% yoy to 3.3% yoy. M3 money supply growth also slowed significantly from 11.3% yoy to 10.3% yoy. Germany Ifo business climate also resumed it's down trend by falling to 102.4 in Apr. Various growth data are arguing that the slowdown in the global economy is finally affecting the Eurozone. Though, Trichet is still expected to maintain an hawkish tone on inflation and acknowledge downside risks to the economy in the post meeting press conference. Markets focus will be on the balance on these messages and thus on the odds of a rate cut from ECB in near term.

Sterling stabilizes a bit after diving to as low as 1.9052 against dollar. While BoE is expected to keep rates unchanged at 5.00%, speculations for a cut has built up after recent weak economic data. The fact that inflation in UK didn't accelerate in March and was unchanged at 2.5% yoy also added some fuel to the speculations that BoE is relatively freer to cut rates. However, note that there isn't any clear sign of a change in pace in BoE's policy easing cycle, i.e. 25 bps every quarter. May is just too soon for BoE to cut rates. Last month's cut was based on a 2-6-1 vote split in with 2 members, Tim Besley and Andrew Sentance actually preferred no change in Apr, David Blanchflower voted for a 50bps cut and 6 other members voted for the 25bps cut. Technically speaking some kneejerk reaction could be seen in GBP/USD if BoE is on hold today but the overall short term trend should still be down. Wilder movements could indeed be seen in EUR/GBP as the corrective rebound may have completed earlier this week already.

Other economic data to be released today include Germany industrial production, Canadian housing starts, US jobless claims and Wholesale inventories.

Suggested Readings:

ECB

• ECB: Preview of Today's Meeting
• BoE, ECB: How Will They Vote? Will the Rate Decisions Derail EUR/GBP?
• EU Market Preview: European Markets Await Trichet's View On Growth, Inflation
• EU Preview: Economists Mixed on Trichet's Remarks After ECB Rate Decision
• EU Preview: ECB's Main Refinancing Rate Widely Expected to Stay at 4.00%
• Monetary-Policy Meeting at the ECB
• ECB Interest Rates: How Far from a Tipping Point?
• (ECB) Press Conference Introductory Statement 10 April 2008

BoE

• GBP/USD: The Bank of England's Rate Decision Will Determine the Next Move
• BoE, ECB: How Will They Vote? Will the Rate Decisions Derail EUR/GBP?
• UK Market Preview: Small Chance of Rate Cut Could Move Markets if BOE Holds
• UK Preview: BOE Likely to Hold May Benchmark Rate at 5.00%
• Monetary-Policy Meeting at the Bank of England
• (BOE) Treasury Committee Questionnaire for Mervyn King
• (BOE) Minutes of Monetary Policy Committee Meeting 9 AND 10 April 2008
• (BOE) Bank of England Reduces Bank Rate by 0.25 Percentage Points to 5.0%

EUR/JPY Daily Outlook

Daily Pivots: (S1) 160.48; (P) 161.76; (R1) 162.50; More.

EUR/JPY's failure to take out 162.98 resistance decisively and subsequent break of 160.58 support on a sharp fall indicates that decline from 164.97 has resumed. Focus is now on mentioned 158.24 support (50% retracement of 151.71 to 164.97 at 158.34). Break of 158.24 support will confirm that rally from 151.71 has completed bring deeper decline towards the lower end of the medium term range near to 151.71. On the upside, above 161.00 minor resistance will turn intraday outlook neutral first. But another fall is still in favor as long as recovery is limited below 163.11 resistance.

In the bigger picture, EUR/JPY turned into sideway consolidation after medium term up trend was limited at 168.93. It's unclear whether such consolidation has completed at 151.71 already and hence firm break of 168.93 high is needed to confirm resumption of the long term up trend. Meanwhile, on the downside, below 158.24 will suggest that such consolidation is going to extend further before completion.

Forex News Digest

• Euro Declines to Eight-Week Low Against Dollar Before ECB Policy Meeting
• Pound Nears 2 1/2-Month Low Against Dollar Before U.K. Rate Decision
• Europe, U.S. Both Want Dollar to Rise Against Euro, Financial Times Says
• Euro May Fall to Fibonacci Chart Level of $1.5230, Tokyo-Mitsubishi Says
• Asian Currencies Slide on Signs of U.S. Strength, Slump in Region's Stocks
• N.Z. Dollar Falls After Employment Report; Australia's Currency Declines
• German Trade Surplus Comes in Lower Than Expected in March
• Australian unemployment rate edges up to 4.2% in April 2008
• The Day Ahead Europe & UK: Central Bank Interest Announcements
• The Day Ahead Canada & U.S.: Canadian Housing Starts
• Wednesday's News Recap: U.S. Pending Home Sales Fall, Oil Rises to New Record
• U.S. Preview: Jobless Claims Set to Fall Back to 370k
• CA Preview: Analysts Expect to See Drop in April Canadian Housing Starts

More Forex News

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