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European Central Bank Cut Rates to Historical Low

A guest post written by DAR Wong

Currency Market Observations – 9 June 2014

Fundamental Outlook

The US manufacturing data shows little improvement but trade balance widens due to rising imports. European Central Bank (ECB) cuts its benchmark rate to 1.5 percent at historical low with deposit rate going down to minus 0.1 percent. Bank of England (BOE) maintains core interest rate unchanged at 0.5 percent. International Monetary Fund (IMF) urges UK to contain the housing bubble and prevents property prices from rising too quickly.

The US Institute of Management’s reports its manufacturing PMI index at 55.4 in May and within expectation. The Commerce Department releases its monthly factory order at 0.7 percent gains after previous month was revised to 1.5 percent gains in April.

The US trade balance widened to USD42.7 billion in May and lower than consensus. Another separate report shows that consumer credit rose in April as credit card spending increased. Consumer borrowing surged USD26.8 billion in April and exceeded the highest estimate, following revised gains of USD19.5 billion in March.

On Friday, American non-farm payrolls gained 217,000 new jobs in May and stayed within consensus regions. Jobless rate was 6.3 percent and almost at 6-year low. Dow Jones benchmarks made new historical high again as it closed at 16,924 levels. The S&P 500 index also closed at new all-time highs at 1949 levels.

The German consumer prices in May were estimate with preliminary data at minus 0.1 percent, causing a knee-jerk in market when compared to expected 0.1 percent gains. The slowdown in largest economy in Eurozone put pressure on European Central Bank to take necessary actions in combatting recession.

Last Thursday, ECB policymakers announced cutting the benchmark rates to 1.5 percent by shaving 10 basis points from 2.5 percent. Deposit rate was moved to minus 0.1 percent to discourage overnight cash held at central bank. However, Euro currency strengthened after the news and reflected the rejection on rate cut by market sentiments.

Last week, Bank of England (BOE) held its interest rates unchanged at 0.5 percent and asset purchase program stays at GBP375 billion . In Europe, UK is the largest individual economy after the 18 nations in Eurozone, and seen with fastest recovery in post-crisis since 2009. Halifax reports the housing prices in May rose 3.9 percent after prior month showed a surge to minus 0.3 percent.

The International Monetary Fund (IMF) urges Britain to curb the housing prices from growing too rapidly and causing new property bubble. Officials stress the UK government has to control price risk and even might have to regulate the mortgage loan-income ratio or scrap the “Help to Buy” program supported by government.

Technical Forecast

USD/JPY has not changed in its sentiment as range is capped in 101.00 – 103.00 regions. As Bank of Japan’s chief Kuroda has stressed on holding on to further stimulus, market traders are now observing US monetary policy in moving USD against Yen. In summary, we reckon no trend projection is necessary for time being until we see the market moves beyond the aforementioned range.

EUR/USD dropped to 1.3502 lows after the Euro rate cut but bounced on the same day to above 1.3600 levels. Technically, we reckon the market is trapped in uncertainty though the policymakers have voiced their preference to see lower Euro values. This week, we foresee the market will be ranged largely from 1.3500 – 1.3750 regions with upside short-covering more likely to be seen.

GBP/USD is making technical consolidation at 1.6800 regions after bouncing off recent 1.6690 lows. This week, the market will be seen resisted at 1.6850 areas which should be resilient in selling forces. If we predict correctly on trading below 1.6850 resistances, the bears may resume very soon and drilling below 1.6680 supports again might go lower at 1.6500 targets.

Dar Wong

This post is contributed by OPF Guest Blogger, DAR Wong.

DAR Wong is an approved fund manager in Singapore with 25 years of global trading experiences. You may reach him at dar@pwforex.com

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DISCLAIMER: This post is written for general information only. The author, publisher and/or any third party involved in the distribution of this work assume no legal responsibilities and shall have no liability whatsoever for any direct or consequential losses, costs or expenses arising from the use of the information contained herein.

 






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