Will the ECB Acknowledge the Slowdown in Growth? (page 1 of 2)

DailyFX Fundamentals 04-04-08

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar: Calmer Times Ahead?

March was a very active month in the currency market. The EUR/USD hit an all time high less than 100 pips away from 1.60 while USD/JPY fell to an intraday low of 95.76. The daily ranges of these two currency pairs have also expanded as 1 month volatility in the EUR/USD reached the highest level since 2004. This suggests that volatility has hit an extreme, which means that it may soon revert back to the mean. In other words, the days of 200 pip ranges in the EUR/USD may be coming to an end. The price action in the US dollar post non-farm payrolls indicate that traders are very divided on the outlook for the US dollar and more specifically US monetary policy. Three consecutive months of job losses warrant a rate cut from the Federal Reserve, but the job numbers alone may not be enough to convince the Fed to cut 50bp instead of 25. Next week, there is barely any economic data that will shed more light on what type of action the Federal Reserve will take at the end of the month. The only meaningful US data on the calendar is the trade balance, import prices and consumer confidence which are unfortunately not scheduled for release until the end of the week. The minutes from the March 18 FOMC meeting could help, but even the Fed has probably not decided how much they should ease at the end of the month. The labor market is deteriorating and will continue to get worse. We do not expect job growth to turn positive for at least another 6 months. Dell and Motorola joined ATA and Aloha Airlines in announcing more layoffs. These 4 companies alone will shave 14k from the US workforce. Base on the outlook for growth the Federal Reserve should definitely bring interest rates down to 1.75 percent on April 30. However by doing so, they are reducing their ammunition and run they risk of stoking further inflation. For these reasons, the Federal Reserve is just as divided as the market, which means that a new trend could have difficulty manifesting itself in the coming week.

Will the ECB Acknowledge the Slowdown in Growth?

The European Central bank will be meeting to discuss monetary policy next Thursday and even though they are not expected to alter interest rates, there is a chance that Trichet could acknowledge the recent slowdown in growth. If he does, this would represent a monumental shift in commentary for the ECB Governor, which would be very bearish for the Euro. He has long downplayed the slowdown in growth to focus almost exclusively on the level of inflation. This was warranted for some time because Eurozone economic data consistently beat market expectations. However, in the past week, things have changed. Confidence within the Eurozone has fallen, consumer spending is contracting while German factory orders dropped 0.5 percent. Aside from the ECB rate decision, there are only a few numbers due for release in the coming week, which are German industrial production and the trade balance. Given the recent turn in economic data, the next move by the ECB is a rate cut and the fate of the Euro will be determined by how quickly that happens.

Bank of England: To Cut or Not to Cut Interest Rates

Of the 3 central banks holding monetary policy meetings next week, the Bank of England is the only one expected to alter interest rates. A 25bp rate cut is the current forecast even though the rate decision is really a close call. The minutes from the last Bank of England meeting revealed that one of the main reasons why the BoE did not cut interest rates last month was because they were worried about how the market would perceive a back to back interest rate cut.