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All eyes on Bank of England and ECB rate decisions
00:00, 05 July 2012
After the fun and games of Diamondgate yesterday, it’s back to business today with a full calendar of economic events dominating headlines in Europe central bank meetings in the UK and Europe, and a Spanish bond auction. In the UK we have the latest interest rate decision from the Bank of England monetary policy committee and there is a widespread expectation that we could well see another £50bn worth of asset purchases. The key bank rate is likely to remain unchanged at 0.5% It would be a major surprise if the Bank did nothing given recent comments by the governor and the very close split in voting patterns shown from the last minutes. Then there was a 5-4 split in favour of maintaining policy as it is. Since then the economic data has not been good and as such given the tone of the minutes with respect to further economic deterioration it wouldn’t be too much of a surprise to see at least one more member slide in to the dove camp. Recent comments by Governor Mervyn King also suggest that he is confident that easing will happen, and the additional easing of policy will be used in conjunction with the other measures announced at the Mansion House dinner in mid-June. Soon after the UK rate decision the European Central Bank is widely expected to cut its key rate by 0.25% to a record low of 0.75%. Given the nature of the weak economic data seen out of Europe there is a building expectation for the Bank to act decisively, however the ECB has always remained extremely cautious when it comes to inflation risks, and even though prices are sliding back it would be a surprise if the bank were to be bolder than a simple rate cut. There is an expectation in some parts that the Bank might do more, however the ECB is nothing if not cautious, so hopes aren’t that high that they might go all in and cut the deposit rate as well. This is the rate that the ECB gives banks when they put money on deposit overnight. This is currently 0.25% and there is some speculation that the bank may cut that too, by around 0.10%, to 0.15% in an attempt to persuade European banks to push that money, where it is not getting much of a return, into lending into the European economy, particularly the peripheral ones. There is also a remote possibility that the might look at another LTRO given that the bank relaxed some of its collateral requirements a couple of weeks ago to accept asset back securities like mortgages and car loans. This remains unlikely given recent comments by ECB board members and their reluctance to add to the risk already on their balance sheet, with questionable collateral. The Bank is likely to err on the side of caution, keeping something in reserve, while keeping the pressure on governments to deliver the necessary reforms, in exchange for further help. Mario Draghi’s press conference post the decision will be particularly important with respect to the prospect of further action the ECB could well take further down the line. Particular focus will be on the bank’s inflation forecasts as to clues to additional rate cuts, as well as any revision lower in growth forecasts. Before the ECB meeting there is the first Spanish bond auction since last week’s EU summit saw EU leaders agree to recapitalise banks direct through the bailout funds. This saw yields drop back from the 7% level on the 10 year measure, however they still remain eye wateringly high, with the 10 year still above 6.30%. Spain is looking to sell between €2bn-€3bn of 2015, 2016 and 2022 bonds. Ireland is also returning to the debt market today with a sale of €500m of 3 month bills, with some optimism that there will be high external demand. Greece will be on the receiving end of its first meeting with Troika officials since the new government was formed and the focus is expected to be on the likely request for a renegotiation of some of the bailout deal terms, given that due to the elections, the country is again well behind its fiscal targets. EURUSD – yesterday’s move lower below 1.2560 keeps the onus on for a retest of the 1.2420 level and last week’s lows. A move below 1.2420 would be the first step towards the 1.2290 lows this year, while the primary objective remains unchanged at the 2010 post first Greek bailout lows at 1.1880. On the upside we can now expect to find resistance at the 1.2620/30 area. The major upside resistance remains at the 1.2750 level which also coincides with a number of other key resistance levels including the 55 day MA at 1.2745 and 50% retracement level of the 1.3285/1.2290 down move at 1.2790. GBPUSD – we got the fall back to the 1.5580 level in thin trading yesterday, with the likelihood that a break of this level could well see further losses towards the key support at the 1.5480 level, 14th and 15th June lows, which we failed to get below last week. Only a break below here retargets the June low at 1.5270. The 200 day MA at 1.5755 remains the key resistance on the topside. Only a close beyond 1.5755 the 200 day MA could target 1.5910, which would be the 61.8% retracement of the 1.6305/1.5270 down move. EURGBP – pullbacks here have continued to remain below the 55 day MA at 0.8067 and trend line resistance from the highs this year at 0.8505 at 0.8078. As long as any pullbacks stay below these levels then further euro losses are the preferred scenario, otherwise we’re looking at resistance at the 0.8150 area. The area below the 0.8000 level seems to be offering quite a bit of support at the moment; however the key level remains the 0.7950 area Once below 0.7950 we could well see a move towards 0.7845 and the November 2008 lows. USDJPY – the choppy range continues to play out within the cloud with the top at 80.45 and the support above the 200 day MA at 78.80. We also have trend line support at 79.40/50 from the 4th June lows at 78.00. To reiterate we need a weekly close above 80.50 to reassure about further upside.