ECB Rate Decision: Biggest Event Risk Next Week (page 2 of 2)

However the only problem is that in recent weeks, members of the European Central Bank have not wavered. Today, ECB member Erkki Liikanen, the governor of the Bank of Finland, reminded the markets that controlling inflation is key. The uncertainty surrounding the ECB interest rate decision should lead to some interest volatility following Trichet's press conference at which everyone expects interest rates to be left unchanged.

Could the Bank of England cut interest rates?

Like the European Central Bank, the Bank of England will also be delivering a monetary policy decision next week and they are expected to leave interest rates unchanged.

The difference for the BoE is that inflationary pressures in the UK are slightly better while economic conditions are slightly worse.

This morning's HBOS house prices and construction sector PMI report both fell short of expectations. This explains why Prime Minister Gordon Brown suffered a humiliating defeat at the polls on Thursday night.

Everyone is looking for the Bank of England to do more, but it remains to be seen whether they will actually deliver.

The BoE has surprised the markets in many instances which means that cutting rates when the markets doesn't expect them to would not be out of character.

However judging from the minutes of the last monetary policy meeting, there may not be many supporters for a rate cut. The MPC voted 6-2-1 for the quarter point cut in April with six members supporting the move, two members voting for rates to be left unchanged and one member voting for a 50bp rate cut.

Commodity currencies in focus next week

The Canadian, Australian and New Zealand dollars will be in focus next week. Not only are employment reports due for releases from all three countries, but the Reserve Bank of Australia will also be meeting to decide on interest rates.

The market expects the labour markets to slow which is the reason why the RBA will leave interest rates unchanged. Retail sales were released this morning and even though they were stronger than expected, the impact on the Australian dollar was limited.

We expect the Australian dollar to continue to rise on the belief that service sector PMI and the trade balance will be Aussie positive.

Yen crosses rally on risk appetite

The Japanese Yen crosses all rallied against the US dollar as risk appetite returns to the market following the better than expected non-farm payrolls report.

All of the Yen crosses are higher, led primarily by the rally in USD/JPY. Whether or not these moves can continue into the coming week will depend upon the market's risk appetite because there are Japanese or US economic releases on the calendar.