The Dollar is staging a recovery in a day when the Bank of England lowers its interest rate to 5.50%. This is a surprise move by the bank as most analysts were still expecting the money price to remain unchanged. Some, however, were starting to consider a cut.
The GBP/USD has lowered to 2.02 while the EUR/USD is testing significant trendline at 1.4520.
With minutes to go for the European Central Bank to makes its interest rate decision, another surprise could provoke some greater volatility to the forex market. It is expected to remain unchanged.
Showing posts with label interest rates. Show all posts
Showing posts with label interest rates. Show all posts
Thursday, December 06, 2007
Thursday, November 29, 2007
Why the pressure is all on the FED
The fact is that the evolution of the global markets is mostly relying on the shoulders of the Federal Reserve. This is not really a good thing as any decision to be taken by the Fed will have negative consequences. It does not really have as much wiggle room as other central banks.
Take the ECB (European Central Bank) for example. Its decision is actually helped by the Fed's activity. The ECB has to balance price stability with economic growth. With Europe suffering increasing inflationary pressures at the same time as a slowdown in economic growth, the decision on whether to tighten monetary policy becomes difficult. If it lowers interest rates to boost the economy it could get a real inflation risk. Raise interest rates and the economy could take a further hit.
However, general market forces will help the ECB to make its decision as well. Although the strong euro has been strongly criticized, the fact is that it is not really hurting exports as much as economists feared. With exports sustained, the ECB does not have to greatly worry about it hurting economic growth. Why are exports sustained?, because the Euro mostly revalued against the dollar. Therefore, exports are simply moving away from the U.S. towards China and other emerging countries. On the other hand, Europeans are seeing an increasing buying power. This helps imports increase as foreign products are getting relatively cheaper. Furthermore, cheaper products help control inflation. For example, with oil priced in dollars, the high euro makes up for part of the higher oil prices.
SO, the higher euro is helping Europe fight inflation. However, the latest indicators show that inflation might be starting to increase in Europe. Therefore, increasing interest rates is not out of the question just yet.
Although economic growth is slowing down in Europe and the credit crisis is being felt, boosting the economy is not as urgent for ECB since the FED is already lowering their interest rates. After all, the credit crisis originated in the United States and more dire measures will have to be taken in that country.
In other words, the FED cutting interest rates is helping the ECB with its objectives. Lower interest rates for the dollar is helping to ease the credit crisis and will help mitigate the spill-over effects to other countries. At the same time, it drives a weaker dollar which in turns helps Europe control inflation, especially on dollar-denominated commodity prices.
U.S. inflation could head into real danger. Consumer prices have been remarkably resilient so far as it remains very close to the 2% level. However, with the Fed passing more cuts, it sets up a real inflationary risk with a steeply declining dollar.
Take the ECB (European Central Bank) for example. Its decision is actually helped by the Fed's activity. The ECB has to balance price stability with economic growth. With Europe suffering increasing inflationary pressures at the same time as a slowdown in economic growth, the decision on whether to tighten monetary policy becomes difficult. If it lowers interest rates to boost the economy it could get a real inflation risk. Raise interest rates and the economy could take a further hit.
However, general market forces will help the ECB to make its decision as well. Although the strong euro has been strongly criticized, the fact is that it is not really hurting exports as much as economists feared. With exports sustained, the ECB does not have to greatly worry about it hurting economic growth. Why are exports sustained?, because the Euro mostly revalued against the dollar. Therefore, exports are simply moving away from the U.S. towards China and other emerging countries. On the other hand, Europeans are seeing an increasing buying power. This helps imports increase as foreign products are getting relatively cheaper. Furthermore, cheaper products help control inflation. For example, with oil priced in dollars, the high euro makes up for part of the higher oil prices.
SO, the higher euro is helping Europe fight inflation. However, the latest indicators show that inflation might be starting to increase in Europe. Therefore, increasing interest rates is not out of the question just yet.
Although economic growth is slowing down in Europe and the credit crisis is being felt, boosting the economy is not as urgent for ECB since the FED is already lowering their interest rates. After all, the credit crisis originated in the United States and more dire measures will have to be taken in that country.
In other words, the FED cutting interest rates is helping the ECB with its objectives. Lower interest rates for the dollar is helping to ease the credit crisis and will help mitigate the spill-over effects to other countries. At the same time, it drives a weaker dollar which in turns helps Europe control inflation, especially on dollar-denominated commodity prices.
U.S. inflation could head into real danger. Consumer prices have been remarkably resilient so far as it remains very close to the 2% level. However, with the Fed passing more cuts, it sets up a real inflationary risk with a steeply declining dollar.
Thursday, November 08, 2007
ECB keeps interest rates steady at 4.00%
As was widely expected the ECB kept interest rates at 4.00%.
Muted reaction on the EUR/USD, currently steady at 1.4655.
Close attention will be paid to Trichet's statement! A hawkish statement could drive the euro higher, investors will be looking out for this.
The webcast could be watched from the ECB website at 8:30am EST, here
Followup: Trichet cites sustained economic growth... strong increase in inflation indicator... expects inflation to be above 2% in following months before moderating in late 2008... positive sign from labor markets... upwards risk to price stability... [crisis led to] large monetary shift to safe, liquid monetary assets ... ready to counter upside risks to price stability
EUR/USD at 8:47pm EST: 1.4660. Market is not surprised
Muted reaction on the EUR/USD, currently steady at 1.4655.
Close attention will be paid to Trichet's statement! A hawkish statement could drive the euro higher, investors will be looking out for this.
The webcast could be watched from the ECB website at 8:30am EST, here
Followup: Trichet cites sustained economic growth... strong increase in inflation indicator... expects inflation to be above 2% in following months before moderating in late 2008... positive sign from labor markets... upwards risk to price stability... [crisis led to] large monetary shift to safe, liquid monetary assets ... ready to counter upside risks to price stability
EUR/USD at 8:47pm EST: 1.4660. Market is not surprised
Wednesday, November 07, 2007
USD drops to new lows
The USD drops to new lows on news that China will diversify its currency reserves. A Chinese official stated that it preferred stronger currencies over weaker currencies. China has a huge amount of U.S Treasury Bonds. If it starts selling them, it will add greater pressure to dollar weakness.
A great article by Kathy Lien of DailyFx explains why the EUR/USD is unstoppable and heading towards 1.50.
As explained, Australian and Sweden increased interest rates. This means that other central banks are willing to increase rates in this economic situation. Only the FED is lowering rates and this change in interest rate differentials is clearly the catalyst for USD weakness. Today's move to 1.4730 most likely reflects anticipation for a hawkish ECB. Most expect ECB to keep rates steady. However, the statement will probably favor the control of inflation. This would mean that the ECB along with other central banks will test the limits of their economies before loosening rates. The FED does not have this luxury because of the credit crisis and can not further restrict liquidity.
In a strange twist, raising interest rates might not have a strong impact on economic growth because it will help Europe offset higher crude oil prices!
A great article by Kathy Lien of DailyFx explains why the EUR/USD is unstoppable and heading towards 1.50.
As explained, Australian and Sweden increased interest rates. This means that other central banks are willing to increase rates in this economic situation. Only the FED is lowering rates and this change in interest rate differentials is clearly the catalyst for USD weakness. Today's move to 1.4730 most likely reflects anticipation for a hawkish ECB. Most expect ECB to keep rates steady. However, the statement will probably favor the control of inflation. This would mean that the ECB along with other central banks will test the limits of their economies before loosening rates. The FED does not have this luxury because of the credit crisis and can not further restrict liquidity.
In a strange twist, raising interest rates might not have a strong impact on economic growth because it will help Europe offset higher crude oil prices!
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