Euro Open: Euro, British Pound In Play As ECB and BOE Promise Massive Rate Cuts

Interest rate announcements from the European Central Bank and the Bank of England headline a packed economic calendar in European trading hours. The ECB is expected to slash rates 0.50% while the BOE is expected to be even more aggressive, shaving a full percentage point off benchmark borrowing costs.

Key Overnight Developments

• Reserve Bank of New Zealand Cuts Rates 1.50% as Expected
• Australia's Trade Surplus Surges in October

The Euro initially rallied to extend gains from New York hours, pushing above 1.27 only to retrace 50% of the move late into the session. The British Pound kept to familiar ranges, oscillating between in a rough 100-pip range between 1.47 and 1.48. Technical positioning points to the likelihood of a bullish correction in EURUSD and GBPUSD in the near term before broad bearish trends regain momentum.

Asia Session Highlights

Australia's Trade Balance offered a bigger than expected surplus in October, showing exports outpaced imports by A$2.9 billion versus A$1.4 billion forecast. The improvement came as exports kept pace at 6.7% having grown 6.5% in the previous month while imports added just 0.3% as compared to September's 7.1%. Outbound shipments are being supported by a markedly cheaper Aussie dollar as well as the lingering effects of China's ravenous demand for Australian coal and iron ore. Looking ahead, brisk export growth is likely to fade as China's own economy succumbs to the global economic slowdown. Still, Australia's external balance may continue to improve as the gloomy outlook for the domestic is likely to continue taking a toll on Australians' demand for imports.

The Reserve Bank of New Zealand validated expectations, slashing interest rates by 150 basis points to bring the benchmark lending rate to a six-year low of 5.00% as 'ongoing financial market turmoil' and 'deterioration in the outlook for global growth' weigh on the smaller antipodean economy. Updated forecasts accompanying the announcement suggest the economy will shrink 0.3% and inflation will fall back within the 1-3% target range through the first half of 2009. Mimicking the tone of the RBA from earlier this week, Governor Alan Bollard backed off explicit promises of further easing. The governor said policy 'will be assessed against emerging developments in the global and domestic economies and the response to policy changes already in place.' Still, traders continue to price in 75-100 basis points in cuts over the next 12 months.

Euro Session: What to Expect

Interest rate announcements from the European Central Bank and the Bank of England headline a packed economic calendar in European trading hours. The ECB is expected to slash rates 0.50% as the 15-nation regional bloc faces the first recession since the introduction of the Euro. Indeed, an updated estimate of third-quarter Gross Domestic Product is set to confirm the economy shrank -0.2% in the three months through September. Traders are betting on further rate cuts into 2009, with overnight index swaps pricing in 150 basis points in easing over the next 12 months. The BOE is expected to be even more aggressive, shaving a full percentage point off benchmark borrowing costs. Minutes from the previous meeting suggested Mervyn King and company were more dovish than traders expected, revealing policymakers were planning to issue a 200 basis point cut (versus the 150bps move that actually materialized) but only held back to avoid spooking financial markets. Priced-in expectations suggest the BOE with at least 1.75% in additional easing over the next 12 months.

Switzerland is expected to see Gross Domestic Product at a standstill in the third quarter to bring the annual rate of economic growth to just 1.7%, the lowest in over 5 years. Last month, the Swiss National Bank unexpectedly slashed interest rates by a full percentage point citing 'higher risk of a marked slowdown in economic activity' from appreciably worsening international conditions. While the markets continue to price in no changes in benchmark borrowing costs, traders may see the Swiss National Bank continue to surprise with monetary easing should the acute economic downturn send inflation too far below the target level. Indeed, the bank acknowledged that the selloff in commodities (and oil in particular) will mean that 'price stability will be restored sooner than expected, and inflation is likely to fall below 2% as early as the end of this year.'

DailyFX

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