July ECB Interest Rate Decision

On Thursday at 0745EDT/1145GMT the ECB is widely expected to raise its benchmark ‘refi’ rate ¼% to 1.50%, according to Bloomberg surveys of market analysts. Recent comments from ECB Pres. Trichet and other officials have reinforced expectations of a rate hike, and we fully expect them to follow-through. We think markets have fully priced in a 25 bp hike, so any subsequent moves in EUR are likely to follow from Trichet’s guidance at the 0830EDT/1230GMT press briefing. Here, we will be looking for indications of the timing and extent of any additional tightening by the ECB. In that regard, we expect Trichet to strike a dovish tone, potentially indicating that the ECB is not embarking on a tightening cycle and that it never ‘pre-commits’ to interest rate decisions. If so, we think there is additional room for the EUR to weaken, potentially to the recent range lows in EUR/USD in the 1.4110/30 area (last 1.4325). We would be surprised if Trichet takes a more hawkish stance in light of weakness in forward-looking Eurozone economic indicators and recent declines in overall commodity prices. However, if he should use the term ‘strong vigilance’ again, indicating a follow-up rate hike at the Aug. 4 meeting, we think EUR/USD would likely rally to test recent range highs in the 1.4500/50 area.

Trading Strategy: With the decline to 1.4280/85 on Wednesday, EUR/USD has retraced 61.8% of the most recent advance from 1.4100/10 to around 1.4575. More importantly, EUR/USD is back in the middle of sideways triangle consolidation zone that has dominated price action over the last several weeks. We would look to trade based on the range continuing to hold, so we would consider the 1.4450/4500 area as an opportunistic level to enter shorts and the 1.4130/80 area as an advantageous entry level for longs. The US June ADP private employment survey will be released at 0815EDT/1215GMT just before Trichet’s press briefing and markets are likely to adjust expectations over Friday’s US employment report based on it. Another anemic jobs reading could see risk sentiment deteriorate yet again, which also biases our view toward EUR/USD weakness and potentially suggests weakness in EUR/JPY as another option to consider.

Source: Forex.com

07.07.2011