Daily Forex Market Commentary: Traders Don’t Expect The BOE And ECB To Cut Rates Thursday

EURO

The euro extended recent losses vis-à-vis the U.S. dollar Wednesday as the single currency tested bids around the US$ 1.4385 level and was capped around the $1.4530 level. The common currency reached its lowest level since late January as traders continued to push the greenback higher after NYMEX crude oil futures for October delivery came off further and tested the US$ 107 handle. European Central Bank policymakers will convene tomorrow and are not expected to reduce the benchmark interest rate at 4.25% at this time. Interest rate expectations derived from the Euro Overnight Index Average (EONIA) suggest traders are not pricing in any easing this year and only 25bps of easing by Q3 2009. There were approximately 60bps of easing price in one week ago but ECB officials have since been rather hawkish in their statements. Comments from ECB President Trichet will be closely scrutinized tomorrow.

Data released in the eurozone saw EMU-15 Q2 GDP growth register 1.4% y/y, down from 2.1% in Q2 and the lowest level since Q3 2003 registered a 1.2% gain. On a quarterly basis, GDP fell 0.2% compared with an increase of 0.7% in Q1. These data evidence the economic slowdown the eurozone is facing. Eurogroup chairman Juncker said policymakers should not consider a stimulus package to improve economic growth in the eurozone. Other data released in the eurozone saw EMU-15 July retail sales off 0.4% m/m and 2.8% y/y. Euro bids are cited around the US$ 1.4315 level.

JPN/CNY

The yen depreciated vis-à-vis the U.S. dollar as the greenback tested offers around the ¥109.10 level and was supported around the ¥108.40 level. Technically, Wednesday’s intraday high was right around the 50% retracement of the move from ¥110.65 to ¥107.60. The yen scored some gains on the crosses where short yen carry trades continue to unwind as yield plays fell out of favour with traders. All eyes are on the Japanese political vacuum following this week’s surprise resignation of Prime Minister Fukuda. LDP mandarin Taro Aso as seen as Fukuda’s likely successor but the next government is likely to be only an interim government ahead of next year’s mandatory general election. The Nikkei 225 stock index gained 0.64% to close at ¥12,689.59. Dollar bids are cited around the ¥106.40 level.

The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥156.25 level and was capped around the ¥158.05 level. The British pound and Swiss franc weakened vis-à-vis the yen as the crosses tested bids around the ¥192.10 and ¥97.30 levels, respectively. The Chinese yuan came off vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8434 in the over-the-counter market, up from CNY 6.8397. The government reported the consumer price index is likely to ease further over the coming months,

STERLING

The British pound lost ground vis-à-vis the U.S. dollar as cable tested bids around the US$ 1.7665 level and was capped around the $1.7840 level. Cable reached its lowest level dating to April 2006 ahead of tomorrow’s Bank of England Monetary Policy Committee interest rate decision. Most traders do not expect the central bank will reduce interest rates Thursday on account of elevated rates of inflation. Most recent economic data, however, have been quite weak and most traders believe it is only a matter of time before the MPC reduces the repo rate.

Data released in the U.K. saw the CIPS PMI services survey improve to 49.2 from 47.4 in July. Also, BRC reported August shop prices were up 3.8% y/y, up from 3.2% in July while the input price index fell to its lowest level since March. Other data saw Nationwide consumer confidence remain unchanged at 52 in August. Cable bids are cited around the $1.7420 level. The euro gained marginal ground vis-à-vis the British pound as the single currency tested offers around the ₤0.8155 level and was supported around the ₤0.8120 level.

SWISS

The Swiss franc depreciated vis-à-vis the U.S. dollar as the greenback tested offers around the CHF 1.1170 level and was supported around the CHF 1.1050 level. The pair reached its highest level since mid-January as traders continued to speculate that Swiss National Bank’s next rate move would be lower. U.S. dollar offers are cited around the CHF 1.1390 level. The euro and British pound came off vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.6015 and CHF 1.9640 levels, respectively.

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