Talking Points

  • Euro: ECB To Keep Rates On Hold, Maintain Non-Standard Measures
  • British Pound: All Eyes On Quarterly Inflation Report, BoE Minutes
  • U.S. Dollar: Advances On Risk Aversion, NFP's Comes Into Focus

The Euro extended the overnight decline to reach a low of 1.4151and the single-currency may continue to give back the rebound carried over from the previous month as the European Central Bank talks down speculation for higher interest rates. After holding the benchmark interest rate at 1.50%, ECB President Jean-Claude Trichet said monetary policy remains accommodative, and went onto say that the central bank will maintain its unconventional tools to provide liquidity. At the same time, the central bank head warned that the downside risk to growth may have intensified in light of the slowing recovery, but repeated that the outlook for inflation remains tilted to the upside as price growth continue to hold above the 2% target.

The balanced tone struck by the ECB suggests that the interest rate will stay on hold throughout the remainder of the year, and the Governing Council certainly appears to be showing an increased willingness to carry its nonstandard measures into the following year as the economic outlook for Europe remains clouded with high uncertainty. As economic activity cools, softening growth certainly dampens the outlook for inflation, and we may see Mr. Trichet continue to soften its hawkish tone for monetary policy as the EU struggles to contain the sovereign debt crisis. However, as the EUR/USD appears to be holding the range from earlier this week, the pair may continue to trend sideways heading into the end of the week, but the near-term outlook for the single-currency remains fairly bearish as it continues to trade within the descending triangle.

Meanwhile, currency traders show a fairly muted reaction to the Bank of England interest rate decision and the British Pound looks poised to trend sideways in the days ahead as market participants weigh the prospects for future policy. As the U.K. faces a slowing recovery, we expect the central bank to endorse a wait-and-see approach in the policy meeting minutes, which are due out on August 17, but the sterling may face a sharp selloff ahead of the statement should the central bank lower its fundamental assessment in its quarterly inflation report. As growth prospects falter, the BoE may see an increased risk of undershooting the 2% target for inflation, and the central bank may show an increased willingness to expand its asset purchase program beyond the GBP 200B target as it aims to stimulate the ailing economy. Should the central bank open the door to expand monetary policy further, the GBP/USD will certainly show a bearish reaction to the new development, and the pair may threaten the rebound from 1.5781 as interest rate expectations falter.

The U.S. dollar gained ground against all of its major counterparts during the overnight trade, and the reserve currency may continue to appreciate throughout the North American trade should the shift away from risk-taking behavior gather pace. As the economic docket remains fairly light for the remainder of the day, market sentiment is likely to drive price action ahead of the highly anticipated Non-Farm Payrolls report, but we may see employment growth miss market expectations once again in light of the recent developments coming out of the world's largest economy. Should NFP's fall short of forecast, we could see a bearish U.S. dollar reaction as the data reinforces a weakened outlook for future growth, and the development may encourage the Fed to retain a zero interest rate policy throughout the remainder of the year as the central bank aims to balance the risks for the region.