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By Gaurav Kashyap, Alpari ME DMCC
Dollar rally fuelled by Greece fears
The late week rally in the Dollar was triggered initially by the ECB's rate decision and gained momentum by uncertainties about Greece and its continued participation within the EU framework. Thursday's ECB rate decision was unchanged as the Governing council decided to hold rates at 1.25%, following the hike of 25 basis points from the previous month's decision.
With the markets largely expecting a hold, it was Trichet's rather dovish views following the decision regarding future rate hikes which had Euro bulls spooked, triggering a selling frenzy in the EURUSD pair and stretched to other currency majors and commodity markets. His usual rhetoric included comments that price growth will remain above two percent in the coming months, the risks to medium term inflation outlook are on the higher side and that inflation expectations must remain firmly anchored.
More importantly, he said nothing indicative of a rate hike in June's meeting and the EURUSD slipped as traders liquidated on the dovish views towards future rate hikes. The downward momentum couldn't be contained during Friday's session as Greek and EU officials met to address Greece's additional funding requirements which are amounting to around EUR30bn in excess required to finance debt for 2012.
News that Greece were exploring options to exit the European Union, initially reported by Der Spiegel, broke and saw risk appetite drained out of the markets, taking the EURUSD towards 1.43 levels - a drop of -4% in approximately 37 hours. The report that Greece would be withdrawing from the currency bloc was denied by EU officials and was also denied by the Greek Finance ministry who said that leaving the EU and reverting to the old Greek Drachma would lead to such a large devaluation that the country's already staggering debt bill would increase by as much as 50%.
US non-farm payroll, labour market data fails to spark rally
Even a much improved US Nonfarm payroll release did little to spark a rally in the currency and commodity markets as market sentiment and risk appetite remained in check following the developments over the previous few days.
Friday's job report showed a solid increase in the US labour market, with overall payrolls showing an increase in jobs to 244K act v 185K exp / 221K prev. Private payrolls increased to 268K act v 200K exp / 231K prev while hiring in the manufacturing also improved. Perhaps the only blemish on an otherwise positive report was the unemployment rate which slipped back to 9.0%. The improved jobs data was able to see US equities close the day in the green, but was unable to stall the EURUSD's rally.
Bank of England holds rates unchanged
In the other rate decisions of the week, the BOE held rates unchanged at 0.50% and we turn to the inflation report on May 11 and the meeting minutes releasing on May 18th to see a change (if any) in the MPC's voting patterns towards future rate hikes.
The RBA also held rates unchanged earlier in the week at 4.75%. The latest consumer price index from Australia showed year on year inflation was at 3.3%, well between the annual inflation target set by the RBA between two to three percent. With the Australian Dollar now trading in a trading band between 1.05 and 1.1, the RBA can afford to hold rates as it lets its currency do its dirty work and keep a check on higher price growth Down Under.
Last week's trading action saw how deeply entrenched sentiment was in the markets regarding future interest rate expectations. The outlook towards rates overshadowed even the all important Friday job report which showed continued improvement in the US labour sector.
With a largely clear economic calendar for today, our attention turns to upcoming data this week which will further stoke rate hike sentiments, and will focus on several inflation readings expected this week including; Swiss inflation data due on Tuesday, Chinese inflation data due on Wednesday and the US inflation reading data due out on Friday. In an among the inflation readings, we will watch the trade data from Australia due out in the early hours of tomorrow morning along with German GDP reading on Friday. And finally, traders will be following any development emerging from the Euro-zone with regards to Greece and their debt issues and will keep an eye on the results of Greece's EUR 1.25B T-Bill auction on May 10th.
Staff
