ECB Stands Ready To Raise Rates (page 1 of 2)

DailyFX Fundamentals 12-06-07

By Kathy Lien, Chief Strategist of DailyFX.com

How Will the US Dollar Trade Post Payrolls?

It has been an active trading week in the currency market and things are only expected to get even more interesting with tomorrow's November non-farm payrolls report. According to our Employment Preview, the arguments are skewed heavily in favor of weak job growth causing everyone from traders to analysts to second guess their original estimates. In fact, many professional analysts have even been spooked into revising their official forecasts. Although everyone may be skeptical of the ADP report, they realize that they cannot dismiss it. As traders, we should first recognize the fact that the dollar has been strengthening for the better part of this week. Although this may be due to external factors such as central bank meetings and stock market strength, it means that traders have not been selling dollars ahead of the release. According to our latest FXCM SSI index, speculative traders are still net short Euros. The forecast for non-farm payrolls is 80k, but we suspect that the whisper number is closer to 100-125k. Therefore a dollar rally on the heels of a strong release could be limited unless we see job growth in excess of 200k. This has become a market of pessimists which means that even if we get a strong non-farm payrolls number, they will be skeptical about whether the number is real and if that strength can be repeated the following month. If we get a bad number however, expect mayhem in the markets because the revisions in payroll forecasts and the recent rally in the US dollar indicates that traders are not expecting payroll growth to be at or below 80k. The reference point here is clear and we could even see dollar weakness if payrolls are 100k or less. With the Bank of England surprising the market with an interest rate cut today, a better reactive trade may be to short the GBPUSD over the EURUSD. If it is a weak number, the hawkish comments from ECB President Trichet this morning makes the EURUSD a better trade.

ECB Stands Ready To Raise Rates

The European Central Bank left interest rates unchanged at 4.00 percent today and to the surprise of the market not only did Trichet hold onto his hawkish inflation bias, but he made sure to let the market know that he will not hesitate to raise interest rates if inflation does not come under control. When it comes to talk, the ECB is the most hawkish central bank out there even though they last raised interest rates in June. This characteristic should help the Euro outperform other currencies in the coming week. According to Trichet, price pressures are very strong and economic fundamentals, despite everyones skepticism remain sound. He has pledged to do all it takes to ensure that second round effects will not happen so traders should be prepared for a rate hike if inflation does not give. As a central bank, the ECB is notorious for making good on their words. On the Euro, Trichets comment that external demand will support exports indicates that he is not worried about the level of the currency at the moment. We continue to believe that 1.50 is the pain threshold for the central bank and we do not expect it to reach that price level before the FOMC meeting. (Get the latest on the ECB meeting at the end of the EUR Trading Room)

Bank of England Cuts Interest Rates by Quarter Point

The Bank of England cut interest rates by 25bp for the first time in 2 years, marking a sharp shift in monetary policy.