Forex Trading

The Euro and the British Pound could see substantial volatility ahead with interest rate announcements from the European Central Bank and the Bank of England on tap in the forthcoming session. Overnight data revealed that Australia’s unemployment rate unexpectedly fell as the economy added 27.3k jobs in April.

Key Overnight Developments

• New Zealand Unemployment Surges to Highest in Over 6 Years
• Australian Dollar Gains as Jobs Surge, Unemployment Rate Falls

Critical Levels



The Euro was little change din the overnight session, oscillating in familiar territory around the 1.33 level. The British Pound followed suit, trading sideways in a well-defined 50-pip range above 1.51.

Asia Session Highlights



New Zealand’s Unemployment Rate surged to 5.0% in the first quarter, the highest in over 6 years, as the economy shed 1.1% of its workforce in the three months through March. The latest data on business confidence suggests a majority of firms expect conditions to deteriorate over the next 12 months, meaning hiring is likely to remain tepid for the time being. Indeed, a survey of economists conducted by Bloomberg reckons the jobless rate will register above 6% in both 2009 and 2010. This will trim disposable incomes for those out of work and encourage precautionary saving for those that are still employed, weighing on spending. Private consumption is the largest component of GDP, so turmoil in the labor market is likely to keep a lid on economic growth. The economy shrank for the fourth consecutive period in the fourth quarter of 2008, shedding -0.9%, and is likely to contract again in the first three months of this year. Faced with deepening recession, the Reserve Bank of New Zealand lowered interest rates to just 2.5% at the last policy meeting and explicitly stated that they “consider it appropriate to provide further policy stimulus to the economy [and] expect to keep [interest rates] at or below the current level through until the latter part of 2010.”

Meanwhile, Australia’s Unemployment Rate unexpectedly dropped to 5.4% in April, down from 5.7% in the previous month and markedly lower than economists’ forecasts of a 5.9% result. The economy added 27.3k jobs, a stark contrast to expectations of a -25.0k decline. The details of the report were even more encouraging, with a 49.1k surge in full-time employment easily overwhelming a -21.8k drop in part-time jobs. The data implies that Australian firms are becoming more optimistic about future demand and expanding production capacity, supporting the central bank’s assertion that existing monetary and fiscal policy measures will adequately support economic recovery. The Australian Dollar jumped 70 pips higher as the data crossed the wires and tested as high as 0.7560 over the following 45 minutes.

Euro Session: What to Expect



Interest rate announcements from the European Central Bank (ECB) and the Bank of England (BOE) headline the economic calendar in European hours. The ECB has notably parted ways with major counterparts in the US, UK and Japan by opting for a “measured approach” to monetary stimulus despite deepening recession and a credible deflationary threat. This is drawing increasing accusations of inadequacy, a trend that is sure to be amplified by rising unemployment levels as the crisis wears on. ECB President Jean-Claude Trichet’s clearly defensive rhetoric is not helping matters, legitimizing calls across grumbling electorates to free national monetary capabilities from the ECB’s lackadaisical posture. Clearly, this threatens the very existence of currency union itself if politicians eager to be re-elected succumb to populist pressure. Trichet delayed the day of reckoning in April by promising a final decision on quantitative easing in May. If today’s summit sees more waffling, the Euro could succumb to substantial selling pressure as traders price in a longer path to recovery as well as the political implications of inaction.

Turning to the UK, the recent signs of stabilization in lending as well as a handful of upside surprises in consumer confidence and retail sales are likely to give the BOE enough reason to hold off on making substantive changes to interest rates (already at 0.5%) or existing quantitative easing measures. Still, unemployment is at the highest in over a decade and the outlook for economic growth remains decidedly ominous: NIESR, a think tank, has said the economy could “continue to decline for up to another year” while the International Monetary Fund revised down their UK economic growth projections by -1.3%, calling for the economy to shed -4.1% through 2009. If this is enough to produce an expansion of the central bank’s asset purchasing programs, the British Pound could slip.

In Switzerland, the Consumer Price Index is expected to fall for the second consecutive month in April, signaling that the inflation is shrinking at an annual pace of -0.6%, the most in over three decades. Deflation threatens to complicate the current economic downturn if expectations of lower prices become entrenched, encouraging consumers and businesses to perpetually hold off on spending and investment as they wait for the best possible bargain. Needless to say this is quite dangerous, opening the door for the mountain nation to sink into long-term stagnation.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro, British Pound in Focus Ahead of Interest Rate Announcements (Euro Open)