What is ECB Officials Saying Ahead of the Central Bank Meeting? (page 1 of 2)

DailyFX Fundamentals 04-07-08

By Kathy Lien, Chief Strategist of DailyFX.com

Will it be a Good Week for the US Dollar?

No news can be good news for the currency market and this certainly seems to be the case for the US dollar which has rallied on little economic data. Consumer credit was the only number released and it came out slightly weaker than expected, which should have been dollar negative, but consumer credit almost never moves markets. Instead, the dollar is rallying because risk aversion is subsiding. This shift in sentiment is confirmed by the rebound that we are also seeing in the Australian and New Zealand dollars. The hope that equity market deal flow is returning with Discover Financial Services snapping up Diners Club and financing becoming more readily available as Washington Mutual receives a $5 billion cash infusion from investors has helped to restore some confidence in the financial markets. Whether this is enough to offset the deterioration in the labor market remains to be seen, but at least for the time being, hope is driving the US dollar higher. With non-farm payrolls behind us, no economic data poses a major threat to the US dollar this week, which is why it could continue to recover. Pending home sales and the FOMC minutes will be released tomorrow, but a weak housing market and the 75bp rate cut by the Fed is almost old news at this point. Since the March 18 monetary policy meeting, the equity markets have stabilized and credit markets have eased, which means that for the time being, the Fed's efforts have worked in preventing far more serious consequences for the US economy and financial system had they let Bear Stearns go bankrupt.

What is ECB Officials Saying Ahead of the Central Bank Meeting?

The Euro is slightly weaker against the US dollar today despite stronger economic data. German industrial production increased 0.4 percent in the month of February, offsetting the 0.5 percent drop in factory orders. Increased construction activity has helped production rise for the third consecutive month. Investor confidence has also improved with the Sentix survey increasing to 4.15 in April from 0.4 in March. Economic data is mixed ahead of the European Central Bank meeting, which gives the ECB the flexibility to either acknowledge slower growth now or continue to ignore it. According to this morning's comments from ECB Bini Smaghi and Bonello, the central bank Governor may opt for the latter. Bini Smaghi reminded the markets that price stability is a top priority while Bonello indicated that economic fundamentals in the Eurozone are still sound. The ECB meeting is the biggest event risk this week and we may not see much action in the EUR/USD before the monetary policy meeting. Meanwhile the Swiss franc has barely reacted to the employment report which improved slightly on a non seasonally adjusted basis. This may be partly due to the fact that the central bank governor for Switzerland was on the wires this morning talking down inflationary pressures. He indicated that the strength of the franc against the US dollar should keep prices in check. The SNB is widely expected to cut interest rates later this year.

British Pound Slips on Housing Market Concerns

The British pound continues to be weighed by housing market concerns. Although Halifax, the nation's largest mortgage lender has yet to reject new mortgage applications, they have started to preference customers willing to put down a larger deposit on home loans.