ECB President Trichet Faces Very Difficult Monetary Policy Decision (page 2 of 2)

Bank of England: Surprise, Surprise

Will the Bank of England be the next central bank to surprise the financial market with lower interest rates? Quite possibly. Going into the BoE meeting, the factors supporting a rate cut include weaker growth, a deteriorating housing market and a sharp increase in LIBOR rates. Arguments in favor of unchanged rates center on inflation which remains at very high levels. The last time the monetary policy committee met, seven out of the nine voters supported unchanged rates while two voters wanted to cut rates. The big question at hand is whether or not a rate cut can or should be delayed until the New Year. Recent comments from Mervyn King and Rachel Lomax reflected the central bank's reluctance to lower interest rates because they were afraid that if they lowered rates to 5.50 percent they would have a much more difficult time keeping inflation near their target level. If the BoE cuts interest rates, the British pound could test 2.0.

Australia and New Zealand Keeps Rates Steady

The Reserve Banks of Australia and New Zealand kept interest rates unchanged today but left the door open for further rate hikes. To the surprise of the market, the RBA released a statement explaining their move and announced that from here on forward, they will be releasing a statement regardless of whether they alter interest rates. Although they were hawkish to some degree, the market was disappointed by the fact that they said "monetary policy should be maintained for the time being," which meant that they don't expect to hike interest rates anytime soon. The RBNZ also felt that inflation would breach their target but there are signs that the housing market is moderating. Both the Aussie and Kiwi appear to be unaffected by the rate decision. Meanwhile the Canadian dollar continued to weaken following yesterday's surprise rate cut from the Bank of Canada. Traders are betting on weak building permits and disappointing IVEY PMI.

Strong Rally in Stocks Triggers Rebound in Carry Trades

The 196 point rally in the Dow today has triggered a rebound in carry trades as the strong ADP numbers helps to boost risk appetite. Tonight we have leading indicators from Japan which is expected to increase, but that should matter little to the Japanese Yen. Instead, the big question at hand is the Dow and whether we are nearing an important technical resistance point set by the 50 and 100 day SMA.