The FX BUZZ
The interest rate play is on, with investors trying to price when rates will go higher both in the Euro zone and the US, looking for early signs is the key. Currently market is pricing both the FED and the ECB will raise rates around the same time with investors hoping to figure which side will blink first. The US cannot afford to raise rates before unemployment stabilizes and the ECB cannot afford to raise rates much faster than the US as to avoid weighing on the EU fragile recovery and not push the Euro even higher which will burden on EU exporters.
The Buzz: ECB to announce unwinding of emergency measures
Highly important economic indicators are due tomorrow with the EU third quarter GDP and the ECB rate decision which will follow. Recent signs show economic conditions in the Euro zone are improving including credit conditions which pose the main concern for policy makers. Inventors’ are expecting GDP growth to be around 0.4% growth QoQ with Germany leading the EU recovery ,ECB rates are expected to be left unchanged at 1%. Investors are currently not expecting any surprises coming from the ECB rate decision as the ECB chairman Jean Claude Trichet stated in more than one occasion he sees ECB rates as appropriate. With EU inflation still tamed market is pricing the first rate hike to be around mid next year and expects the monetary tightening process to be slow and gradual. So far the ECB has not surprised markets in its statements and is known to gradually change its rhetoric to prepare markets well before it actually changes its policy. The ECB has mentioned in its last meeting the desire to unwind non conventional emergency measures to the economy, meaning liquidity injections to the EU credit markets. The ECB is expected to announce a gradual unwinding of those measures with an emphasis on the gradual manner as to not shake markets and allow banks to slowly adjust to the new conditions. The move is expected to confirm investors’ assumptions and provide some support for the Euro.
What should you watch for?
ECB Meeting, a Change in the ECB rhetoric-If the ECB chairman starts mentioning higher rates even in a rather modest manner it means rate hikes might be sooner than anticipated but still well into next year. This could create strong momentum for the Euro with investors expecting US rates to rise around the same time as the EU, a sign rates in the EU will rise before the US is Euro bullish. In addition if the ECB decides not to unwind emergency measures or unwind faster that anticipated this is also something that should be noticed with a faster than expected unwinding Euro positive and slower than expected EU negative.
The Buzz: US Unemployment is the key for rate policy
ADP employment change an indicator which measures hiring in the private sector slightly disappointed today with a fall of 169,000 Jobs, the indicator is considered to be a projector of the Nonfarm payrolls and the US unemployment both due on Friday, nevertheless market expectations remained intact with investors expecting US unemployment to remain at 10.2% and Nonfarm payrolls to fall -111k an improvement from the previous reading of -190K. FX players from their side are increasingly looking for the US job market to show tentative signs of improvement, why? It is true that unemployment is an important indicator of economic health but most importantly for FX traders it is a preliminary sign that the Fed monetary tightening is getting close. Historically in recessions the Fed has always waited for unemployment to go in the “right” direction before rising rates. This time it should not to be any different with the pace of Jobless slowing down inventors are pricing a rate hike around mid next year and unemployment to top out slightly before with a reading of around 10.4%.Since the unemployment figure is so closely watched by the market and is considered to project rate hikes any indication unemployment is stabilizing faster than anticipated could move market to price a rate hike faster than anticipated thus folding some of the bearish dollar bets.
What should you watch for?
Initial Jobless Claims- Initial Jobless claims due tomorrow is expected to stand at around 480K with inventors getting used to a figure under 500k, the initial Jobless claims might even surprise for the better with Christmas hiring in the background potentially knocking off around 20K claims. A good surprise might revise upwards the expected figure of the Nonfarm payrolls due on Friday.
Nonfarm Payrolls and Unemployment- Nonfarm payrolls are expected to shed around -111k Jobs and unemployment to stand at 10.2% ,if Nonfarm payrolls will surprise substantially for the better it will cause investors to reassess the time horizon for the first rate hike by the FED, consequently pushing the Dollar higher. Any negative surprise will have the opposite effect on the Dollar.
The Technicals:
EUR/USD Daily
Bullish Scenario–A daily close above 1.5150 would move the pair to test resistance at 1.53.
Bearish Scenario- A Daily close under the 1.5$ mark would move the pair to look for support around 1.48
The FX Buzz provided by eToro
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