BOE/ECB Rate Decisions and Speeches by Bernanke and Obama

Thursday, September 8 will see a multitude of events that may set market direction for the near-term. Below I outline the events and my expectations for the potential outcomes and an overall market outlook.

Bank of England Rate Decision: On Thursday at 0700EDT/1100GMT the BOE is expected to hold rates steady at 0.50% and make no changes to its asset purchase program. The BOE decision should be a non-event, but there is a minor risk, in my view, that the MPC will surprise and announce it is re-starting its asset purchase plan. If so, I would expect the reaction to be GBP-negative, with the degree of weakness depending on the amount of additional asset purchases.

ECB Rate Decision: at 0745EDT/1145GMT, the ECB is unanimously expected to hold its benchmark refi rate steady at 1.50%, according to Bloomberg surveys. The rate decision should be a non-event, but I look for a more significant market reaction to Trichet’s comments in his 0830EDT/1230GMT press briefing (his second last before retiring as ECB pres. at the end of October). In the ECB economic outlook, I think the key risk is that the ECB notes an increase to the downside risks to growth while also observing that inflation pressures have moderated recently (July EZ CPI fell -0.6% MoM; steady 2.5% YoY; core CPI YoY dropped to 1.2% from 1.6%). Taken together, I look for a more dovish statement than even the last ECB meeting, which may lead to a more pronounced pricing-out of ECB rate hike expectations, and possibly more explicit expectations of rate cuts. If the statement is that dovish, I would look for the EUR to test the key 1.3950/70 support level (trend line support from the June 2010 lows), with a break below setting the stage for a potential drop to the recent 1.3830/40 lows initially. Markets will also be paying close attention to what the ECB has to say about its purchases of Italian and Spanish government debt, with a particular focus on the degree of support for those measures within the Governing Council (GC). The more supportive the GC is of the bond buying, I think the more likely the EUR is to stabilize, and vice versa.

Fed Chair Bernanke’s Speech: At 1300EDT/1700GMT, Ben Bernanke will speak on the US economic outlook in Minneapolis. Coming just a few weeks after his last speech in Jackson Hole and the recent FOMC minutes, markets will be looking to see if Bernanke shows any added urgency for additional easing to measures. I think markets are leaning toward expecting additional Fed accommodation at the Sept. 20/21 meeting, most likely in the form of lengthening the maturity of debt held by the Fed to push longer-term rates lower. To the extent Bernanke reinforces that possibility and appears to exclude additional asset purchases (no QE3), I think it could be USD supportive. To the extent Bernanke takes a wait-and-see/need-more-info attitude, markets may be left wanting, which could be risk negative. It’s a difficult call, however, as I think Bernanke will paint a picture of a sluggish recovery, but one that is continuing and not in danger of slipping into recession.

Pres. Obama’s Jobs Speech: At 1900EDT/2300GMT, US Pres. Obama is expected to unveil his plan to boost job creation and stimulate the US economy. Initial reports suggest the total size of the package will be around USD 300 bio, or roughly a little over 2% of GDP. But a significant portion of the package will be an extension of the 2% payroll tax cut adopted at the start of this year and set to expire at the end of the year, meaning actual new stimulus is only likely to amount to around 1% of GDP. Additional measures are thought to include aid to states and local governments to avert teacher layoffs and support infrastructure construction programs. There may also be a mortgage modification plan, but details were scarce ahead of the speech. Overall, it’s likely to be a pretty modest effort at stimulus, and given Republican opposition to new spending initiatives, only the tax cut portions seem likely to gain enough support to be adopted, reducing the stimulus further. For that reason, the Republican response to the proposals will be critical to assessing the overall market response. Overall, I think Obama’s stimulus initiative will essentially leave the US outlook unchanged: not getting any better, but not likely to get any worse either.

Market Strategy: Near-term we remain sellers of EUR/USD on strength and our focus is on the 1.4200/50 area as an opportunistic entry level (between 38.2% and 50.0% of the recent decline and just below the daily Ichimoku cloud). With US yields near historic lows, getting short USD/JPY on remaining strength in the 77.50/78.00 area also looks like an advantageous entry area, with a relatively tight stop above 78.30 (just above the 78.10 daily Kijun line). In terms of risk sentiment, it’s a very messy picture to put it mildly, but the current rebound in stocks and other risk assets seems most likely to be relatively short-lived. Overall, I think the events above may provide some short-term solace, but ultimately reveal that policy-makers have exhausted most efforts to stimulate major economies and are reduced to fiddling around the margins, leaving investor sentiment up in the air with little to sustain it.

Source: Forex.com

07.09.2011