Rate decisions key to movement of Sterling and Euro

We expect the Sterling and the Euro to remain volatile ahead of the much anticipated interest rate decisions. With the European Central Bank (ECB) rate decision meeting due today, there is wide anticipation that the ECB would hold its benchmark interest rate steady at 1.50%; though off late there has been some speculation of an rate cut given the worsening economic climate. While an interest rate cut is not likely, other factors could weigh more heavily on the Euro. Investors are awaiting signals from the ECB to relieve the pressure on European bank funding problems with the reintroduction of unlimited 12-month lending (LTRO) to these banks at fixed rates. Similarly, all eyes will be on the Bank of England (BoE), with the Monetary Policy Committee (MPC) expected to hold interest rate at 0.50%. Traders are keenly eyeing contours of a possible additional quantitative easing from the BoE.

Pound Sterling – UK Markets

Today, the focus of sterling traders will be on the policy decisions of the ECB and the BoE. Besides the rate decision, traders are keenly eyeing whether the BoE will announce an expansion of the asset purchase target, to shore up the flagging UK economy. While some investors speculate that the bank could announce more easing as early as today, November is still considered as a more likely date. We anticipate that the central bank would increase the asset purchase target, in the currently £200.0 billion bond program. Yesterday, the pound pared some off its declines, after data indicated that UK services sector rose at a faster-than-expected rate in September, but retreated again, after its second quarter GDP growth was revised lower.

US Dollar – US Markets

The US Dollar is continuing its northward journey, amid increased risk aversion amongst investors, given an uncertain economic environment. However we expect increased volatility in the run up to key policy meetings in Europe and UK. Yesterday, the US Dollar pared some of its gains, after reports of an expansion in the US service sector for the 22nd consecutive month in September, and a better-than-expected addition to the US private sector employment for the same month, boosted demand for riskier assets. Comments from European Union officials that they supported a re-capitalisation of banks also helped to boost risk sentiment, curbing the safe-haven appeal of the US Dollar. We expect the currency to hold onto its gains in recent weeks, in the near term, unless European officials take bold and concrete steps to resolve the Greek debt crisis.

Euro – European Markets

The Euro was under some pressure during the early trading, as investors exercised caution, ahead of the European Central Bank’s rate setting meeting scheduled later today. Although it is widely anticipated that the central bank would retain its key benchmark rate, off-late expectations of lowering the rate has gained momentum, considering the dismal economic scenario in the Eurozone. There is also expectation that the ECB would re-initiate unlimited 12-month lending (LTRO) to Eurozone banks at fixed rates to relieve the pressure on European bank funding problems. A key economic release today is the German factory orders for August, which is expected to indicate a slower growth. Investors are also eyeing Spanish note auction scheduled later today.

Other Currencies – Highlights

The Swiss franc is trading weak against the Euro, amidst speculation that Switzerland might raise its target rate from 1.20 francs to 1.30 francs against the Euro. The Federal government's expert group expects that a strong Swiss franc would weigh on exports and would have a negative impact on the country’s growth. The Swiss State Secretary for Foreign Trade, Marie-Gabrielle Ineichen-Fleisch, stated that Swiss National Bank's setting of a 1.20 franc-per-euro floor had brought stability, but a euro/franc exchange rate of 1.30 or 1.40 would be better. However, the Swiss annual inflation accelerated to 0.5% in September. The higher-than-expected growth in inflation may prevent the central bank from intervening in the forex markets. We expect the Swiss franc to continue to trade weak against the Euro.