Forex Trading

Euro and Pound trading remained relatively flat in the hours prior to the rate announcement by the Bank of England. Despite expectations that the bank will keep the policy rate steady at 0.50%, investors will be looking for explicit language in the accompanying statement that indicates a policy shift towards that of the Federal Reserve’s massive $1.25 trillion quantitative easing program.

Key Overnight Developments

• Australian Unemployment Rate Spiked to 6-Year High, 5.7%
• Japanese Machine Orders Surprisingly Rose in February

Critical Levels



The Euro traded in a tight daily range of 50 pips against the U.S. Dollar throughout Asian trading. Overall the pair remained flat when compared to yesterday’s session. Pound traders saw little or no new strategic entry points for longer-run trades as limited volatility confined the day’s range to 56 pips against the Dollar.

Asia Session Highlights



Japanese Machine Orders surprisingly rose in February, by 1.4%, after the dour month of economic data led forecasters to call for a decline in the figure of -7.0%. February’s figure is the strongest of such since September, when orders grew by 5.5% in the single month. Generally, such a rise in a leading indicator like this would insinuate that the overall economic picture may be starting to improve as the demand for capital intensive goods begins to rise. Such a positive outlook may not necessarily be the rational thing to feel. Much of the underlying activity in the performance of the figure came from an 86.7% rise in the orders for textile machinery. Looking back at history, we’ve noticed that February is an unusually impressive month in terms of the demand for textile machinery; last February this portion of the metric rose 448%. One explanation for such increases during the month is that Japanese clothing manufacturers begin to prepare and produce for the warmer weather 2-3 months prior to the actual realization of the warmth. Demand for non-ferrous metals were the second strongest in the month. Such metals include copper, which had the largest 3-month price rise since 1985 in 09Q1. In essence, much of the rise in the demand for these non-ferrous metals has been price-based and not volume-based. As such, we cannot infer that the surprise move by machine orders is indicative of a sooner-than-expected recovery in the Japanese economy.

Australian labor data performed much weaker than that which had been anticipated by the median forecast of economists surveyed. Indeed, the unemployment rate spiked to a 6-year high of 5.7% in March after expectations called for a hike of only 0.2 percentage points from 5.2%. March also saw 34.7K overall jobs lost with 40K full-time ones being eliminated. Over the last 6 months, the number of these full-time slots has plummeted by 115.2K; a substantial portion considering a labor force of only 11 million. The figures come just 8 days after Deputy Prime Minister, then acting as Prime Minister while Kevin Rudd was in Britain for the G20 conference, Julia Gillard, stated that the rate of unemployed would likely favor the 7.0% mark in the coming months.

Inflation expectations among Australians notched up from March’s decade low by 0.2 percentage points, to 2.4% in April. Of the laborers surveyed in the four occupational classes, only the clerks and salespersons category expected inflation to rise. This may be due to the notion that those working in this category will be those who benefit the least from Australia’s previous two stimulus packages. The dual-plans, which may become a trio in May, seek to give cash grants primarily to families. Since salespersons are more likely to be younger and hence less likely to have a family, they may feel that inflation will disproportionately affect them in greater numbers.

Euro Session: What to Expect



The interest rate announcement from the Bank of England headlines the economic calendar in European hours. While expectations widely call for policy rates to remain unchanged at the record-low 0.50%, price action may turn volatile regardless if Mervyn King and company signal an expansion to standing quantitative easing measures. So far, the bank has committed to buying 75 billion pounds in medium- and long-term government bonds. The growth and inflation outlooks are certainly supportive of a looser monetary stance: reputable think tank NIESR reported that the economy shrank -1.5% through the first quarter and could continue to contract for up to one more year; meanwhile, the Producer Price Index is set to fall to 2.1% in the year to March, the lowest since August 2007, pointing to downward pressure on consumer prices (the headline inflation gauge) in the pipeline as manufacturers pass on lower production costs via cheaper finished goods. Separately, the Trade Balance deficit is expected to narrow to 3.45 billion pounds in February from 3.58 billion in the prior month. This seems plausible if lackluster consumer demand weighs enough on imports to outpace the drop in outbound shipments, the latter fueled by the impact of the global downturn on foreigners’ purchases of UK wares. Indeed, consumer confidence has been hovering near record lows since January.

Turning to the continent, the final revision of Germany’s Consumer Price Index is set to confirm initial estimates calling for headline inflation to slow to 0.5% in the year to March, the lowest in nearly a decade. Despite tumbling prices and deepening recession across the Euro region, the European Central Bank cut interest rates less than economists expected last week, although bank president Trichet did say that rates had not reached “the lowest limit” and revealed that “the Governing Council intends to decide on further non-standard measures at our next monetary policy meeting”.

Switzerland’s annual Unemployment Rate is set to tick higher for the fifth consecutive month, rising to 3.3% in the year to March. The reading points to further downward pressure on economic growth: private consumption accounts for about 57% of total output and job losses will surely weigh on disposable incomes and trim spending. The government has forecast the economy will shrink -2.2% this year, the most since 1975.

Written by Ilya Spivak, Currency Analyst
Article Source - All Eyes Point Toward Bank of England Language In Hours Before Meeting (Euro Open)