Euro anticipates susceptibly on ECB rate decision

05-07-2009 11:03

The Euro started to find support after it fell to a 1.3251 level versus the Dollar due to rising speculations that the European Central Bank may not lower rates which was stimulated by German factory orders surprisingly increasing by 3.3% in March. For the first time in seven months the German factory orders reading turned out positive and drove the EUR/ USD to a 1.344 level. The rise in foreign demand was caused by a 6.1% increase from eurozone members as more signs indicate to a slowing recession.

ECB expected to cut rates to record low

It is likely that the ECB will lower rates by 25 bps to a record low of 1.00%. This could be the bottom for monetary measures as various members seemed unwilling to surpass the 1.00% level. That scenario could increase the Euro if the measures are not in accordance with the quantitative easing actions. The central bank refused to imitate the Fed and BoE purchase government debt program because this strategy is complex to implement in an economy of 16 countries with distinctive debt instruments. The central bank could leave the rates unchanged and prefer the measured approach due to the present recovery in the eurozone PMI and German IFO reading. Taking the present disharmony among the members of the central bank into consideration, there may not be sufficient support to change policy. Nevertheless, if policy makers decide on a more rigorous rate cut and or quantitative easing actions the Euro could fall below support at 1.3151; the 50-Day SMA.

Central bank probably leaves benchmark rate unchanged

The Pound Sterling has faced volatile price action in advance of the BoE rate decision. It is likely that the central bank will leave their benchmark rate unchanged at 0.50%. Nevertheless, the central bank may increase their quantitative easing attempts which begun to affect credit markets proved by Libor rates falling under 1% for the first time. Governor King declared that the completion of their initial government bind purchasing program will need at least two months which could devaluate today’s rate decision. The committee is expected to refrain from declaring a statement if they leave rate unchanged and abstain from deciding on more non-traditional measures. The GBP/ USD reached a 1.5186 level today through which the January 8th level of 1.5375 forms the next obstacle. There is support below 1.500 and 1.4819; the 20-day SMA.

Bank stress test results will determine sentiment

At first the Greenback traded higher versus the Pound and the Euro but later, with the BoE and ECB rate decision ahead, it has been pressured on the back of higher stock markets in Europe and Asia which continue to stimulate risk appetite. Nevertheless, that sentiment may reverse if the bank stress tests results prove that more banks than speculated require additional capital which could change present optimism and stimulate the Dollar. There have been rumours that Wells Fargo, JP Morgan and Goldman Sachs are sufficiently capitalized while Citigroup and Bank of America will probably increase capital by releasing common stocks. The bank stress test results and European policy makers will dominate price action while the announcement of the initial jobless claims could also impact the markets. The employment data follow yesterday’s ADP report which proved that the labour market is recovering. Market participants will be looking to see if the jobless claims stimulate the optimistic outlook, anticipating on tomorrow’s NFP report. Additionally, ICSC same store sales will prove if recovering economic conditions and increasing optimism are converted into improved consumer demand. If traders are aware of the fact that the US consumer returns online then stock markets could increase further and the Greenback may decline.