The interest rate decisions of the Bank of England (BoE) and the European Central Bank (ECB) were meant to take center stage, but it was accelerating dollar sell off that dominated throughout Asian trade and the morning European session, hitting a new low against the euro at $1.5912. Record highs in oil have led the rally in metals, all at the expense of the greenback. There was no surprise in any of the two interest rate decisions as the BoE cut rates by 25 basis points to 5.00% and the ECB held at 4.00%.
As ECB president Trichet prepares to speak at the press conference at 8:30 a.m, the weekly jobless claims are expected to have dropped to 385,000 after last week’s 38,000 jump to 407,000, which was the highest reading since Sept. 17, 2005, the week following Hurricane Katrina. The less volatile four-week moving average had jumped by 15,800 to 374,500, the highest since October, 2005. Continued claims rose to 2.94 million, the highest since July 17, 2004. Markets await the status of what the Labor Department referred to as ‘seasonal difficulties’ arising from the Easter Holiday. Yet even we drop below the 400,000 handle, the 390,000 territory remains consistent with the newly hit 5.1% unemployment rate in the March report, which may be revised down in the following week, but the climb remains consistent with recessions than the 360,000 to 370,000 range seen earlier.
Also at 8:30 a.m. EST is the U.S. February trade balance expected to have improved to $58 billion from $58.2 billion.
Sterling losses to deepen
The Bank of England made the widely expected decision to reduce interest rates by 25 bps to 5.00%, the third rate cut of the current easing cycle, which began in December. Sterling hold steady after the Monetary Policy Committee stated inflation would remain high before easing later in the year on spare capacity. The MPC added that sterling weakness will support exports, making yet another reference to the weak currency. MPC officials have often talked down the pound, either as a forecast or a theoretical statement. High inflation has served as an obstacle to the hawks in the Monetary Policy Committee made as price growth hit a 9-year high of 2.5% in February. Nonetheless, BoE Governor Mervyn King has repeatedly stated in past testimonies his forecast for a retreat in inflation toward the latter part of the 2-year projection period.
Since assuming independence in 1997, the BoE led an active monetary policy, displaying more frequency in policy cycle shifts than its U.S., Japanese and Euro zone counterparts. It took five months for the central bank to shift from rate hike in July 2007 to a rate cut in December, while it took 15 months for the Fed to shift from the final tightening of 2006 to the rate cut of last September. The ECB also took more than a year to shift from one cycle to another. Such frequency in policy shifts is a reflection of the size of the economy, in contrast with the United States, Japan and the Euro zone. This may also help explain the 75 bps to 100 bps in further interest cuts priced in for the BoE later this year.
Despite the emerging damage in the dollar, we expect sterling’s indirect strength to taper off and push back cable towards $1.9740. Key support stands at $1.97. We continue to deem any bouts of sterling strength as a manifestation of USD weakness, which makes it a bear trap for GBP. Upside seen capped at 1.9840.
Opportune euro soars to record highs The euro hit a new all time high against the USD and GBP at $1.5912 and 0.8023 as markets widely expected the ECB to reiterate its focus on inflation at today’s interest rate decision by further ruling out any near term rate cuts, at a time when the Fed and the BoE remain in easing mode. The key question is whether ECB head JC Trichet will temper his usual hawkishness rhetoric at the 8.30 am EST press conference as the single currency surges to new highs. It is important to note that the latest surge in EURUSD is a full manifestation of broad USD weakness fundamentals and broad EUR strength as both central banks are forced by opposing economic currents to manage their monetary policies. At any rate, the market will monitor for any accentuation of the downside risks by Trichet. We give very little weight to any remarks reiterating the importance of the strong dollar as long as Trichet continues to validate the prevailing monetary policy.
We expect EUR/USD to retest the $1.59 figure and breach $1.5930 until facing selling pressure near the 1.5965-70. Although reports stated that ECB’s Dennis Quaden will meet with president Bush to reiterate the importance of the strong dollar policy, markets have made up their mind that the ECB’s interest rate policy will have a more influencing effect on the dollar than Washington’s rhetorical policy. Support climbs to previous resistance of $1.5840, followed by 1.5810.
USD/JPY to break under 100
Rapid erosion in market confidence during the Asian and European sessions boosted the yen across the board as a combination of recession concerns in the United States and renewed retreat in global equities will favor a retreat in risk appetite and reward the low yielding yen. The retreat in U.S. stocks continues will add more losses to the pair, and we expect the 99.60 to act as the next key support.
We now expect the S&P500 to break below the 1,300 level during the fourth week of April and to anticipated the 1,255 to be tested lows to be tested after the April 30 Fed decision. Consequently, this translates into further yen gains across the board, including 98.70 vs. USD and 197 vs. GBP. Further retreat towards 93 is seen at the end of the quarter.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
