Both Britain and Europe to announce rate decision, one day ahead of U.S Non-Farm Payrolls

It is a very busy day ahead, as both the European Central Bank and the Bank of England are scheduled to announce their rate decisions.

Early this afternoon (1245GMT), the European Central Bank will announce its Minimum Bid Rate. The ECB, is expected to keep benchmark interest rates at its current record low level of 1.0%. This prediction come after Jean-Claude Trichet, president of the ECB, indicated that he would like wait for new growth and inflation forecasts in March before deciding when to step up the withdrawal of measures used to battle the financial crisis. Continual concerns over rising unemployment, in addition to increasing apprehensions that Greece’s fiscal problems could spread through the Euro zone, complicate the ECB’s efforts to return the euro-area economy to health.

The ECB announcement comes shortly after the Bank of England’s official rate decision (1200GMT). Analysts do not predict a rate hike- the BoE, is expected to leave the overnight rate at its historical low level of 0.5%. This decision comes out following earlier announcements, and indicators that that the UK emerged, barely, from the recession in the 4th quarter of last year.

The pressure is high for the Euro and the Pound, as these two highly anticipated rate decisions, come one day ahead of the U.S Non-Farm Payroll Change (announce tomorrow at 1330GMT), and follow yesterday’s release of a better than expected ADP Non-Foreign Payroll figure.

The release of ADP Non-Foreign Payroll, widely considered as an indicator for the NFP, fueled the dollar towards appreciating against both the Pound and the Euro. Following the release of the ADP figure yesterday, the EUR/USD, fell below the 1.4 mark, hitting 1.3960. This bearish reversal, further confirms that the Euro is on the cusp of entering a downwards trend against the dollar- any unexpected news in the ECB official bank rate today, could send the Euro spiraling downwards against its USD counterpart.
Moreover, the positive news in regards to U.S employment further caused the Pound to depreciate against the dollar. Yesterday, the GBP/USD tumbled from a 1.6070 session high to close at 1.59003.

For the first time in a long time, analysts are predicting an increase in the US Non-Farm payrolls of 10K. Last month’s Non-Farm Payrolls were disappointing and showed a loss of 85,000 jobs in the US in December. Hopes were already high for the Non-Farm Payrolls, but expectations increased exponentially when yesterday’s ADP Non- Farm Employment Change, was much better than expected. The ADP figure, which measures the jobs in the private sector, showed a loss of 22,000 jobs. While it is still a negative number, it is much lower than the expected loss of 31K, and lasts months loss of 61K.

Apart from increasing against both the GBP and the EUR, the positive results of the ADP figure, triggered the USD/JPY to rebound from 90.05 session low has extended to session high at 90.85 high.

The release of a better than expected positive result in the Non-Farm Payrolls on Friday will certainly further boost the dollar against its major currency counterparts, and raise chances of a future rate hike. While there have been many signs that the U.S is on the road to recovery (namely the higher than expected Q4 GDP, announced last week), a strong number in the NFP, will surely push the USD on the path to regaining some of last year’s traumatic losses.

Euro continues to face a tough battle

The U.S dollar slipped further away from its six month high against the Euro, as concerns in the Forex market began to ease over Greece’s debt. The EUR managed to keep a firm hand, on overnight gains, reaching $1.36969 (increasing 0.18% versus the USD) in the Asian Markets early this morning. However, the Euro continues to face a tough battle, as investors continue to remain skeptical over Greece’s, and now Portugal’s, financial problems.

Whether the Euro manages to hold on to this morning’s gain against the US dollar is yet to be seen- as both the EU and US are set to release two pivotal reports later this week (EUR minimum bid rate, USD Non-Farm Payroll Change).

Tomorrow (1245GMT), the European Central Bank will announce its minimum bid rate- Jean Claude-Trichet, the president of the ECB, is predicted to leave the overnight Interest rates unchanged at 1.0%. Unemployment in the European Union has skyrocketed to 10%, while the recovery from the recession is still wavering- the decision to keep the rate low will hopefully give the EU a stronger push towards economic recovery.

Later today (1315GMT), the US will release its ADP Non-Farm Payrolls, a predictor index for Friday’s widely anticipated Change Non-Farm Payroll. The index is predicting a further decrease in the number of employed people by 31K; a substantially smaller decrease than last month’s fall of 84K. Also today, the US will release it ISM Non-manufacturing PMI expected to come in at 51.1, versus a prior level of 49.8 in December. A reading of above 50 signifies growth, indicating that service industries in the U.S are expected have expanded in January.

This morning the Asian market saw an increase in the GBP, as the sterling rose following news that the UK consumer confidence improved in January coming in better than expected and increasing 3 points from the previous month. The Pound advanced against 15 of its 16 major counterparts following news that that consumer sentiments were improving. Following the release of the index, the British currency rose to $1.6027 (6:40 GMT) from $1.5973 in at closing in New York yesterday.

Britain managed to return to economic growth in the Q4 of 2009, as both housing prices and unemployment began to decline. However, this small increase in the Pound could easily be lost. Tomorrow, the Bank of England will announce the Official Bank Rate- the Monetary Policy Committee is expected to leave its key interest rate unchanged at the record low level of 0.5%. Moreover, the BoE is expected to call an end to its radical policy of pumping out new money after Britain narrowly emerged from the recession in the last quarter of 2009. Introduced almost one year ago by the Bank of England, this extreme policy’s objective was to encourage commercial banks to increase lending to both businesses as well as individuals.

Australia’s trade deficit continued to widen last December, as imports of goods such as gasoline and oil reached 2 year high – further adding evidence to the economic recovery. Imports rose 6% last December, the biggest monthly gain since May of 2008 (oil and gasoline imports jumped 26%, while gold imports swelled a record 51%). Following yesterday’s decrease of 1.4% against the USD (due to the unchanged overnight rate), news of the increased trade deficit, caused the Aussie to continue to fall against the greenback- dropping from 88.7 U.S cents to 88.64 U.S cents after the announcement.

The fate of the AUD is still up in the air, as tomorrow (0030GMT) the Australian Bureau of Statistics will release its monthly Building Approval, expected to fall 0.2% versus prior increase of 5.9%, and its Retail Sales, expected to increase slightly by 0.3% versus prior reported increase of 1.4%. The RBA’s decision yesterday to keep the interest rate unchanged at 3.75% sent the Aussie on downwards spiral. If these two reports come in better than expected the Aussie could potential regain some of yesterday’s and today’s losses.

The USD makes a surprising recovery

The USD finished off last week on a very positive note as the dollar rose against all major currency, following the release of Friday’s stronger than expected economic indicating that the United States was recovery faster than other developed countries.

When markets closed on Friday, the Dollar reached a 7 month high versus the Euro as the EUR/USD drastically fell allowing the dollar to cross the 1.4 EUR/USD mark- closing at 1.3860. The dollars increasing momentum was also shown as it hit a hit a three week high against the British pound, closing at 1.5983 on Friday. The USD also gained against the CHF and the CAD.

The gains in the US dollar can be attributed to the release of Friday’s advanced GDP. The report showed a rapid increase of 5.7% for Q4 of 2009 – the fastest increase in 6 years. Such positive data raises expectations that the U.S FED would potentially increase interest rate before the European Central Bank, thus encouraging investors to move into dollar based assets.

However, despite this unexpected accelerated growth in the Q4, many economists are concerned that this economic rebound may not be sustainable as fiscal and monetary stimulus is withdrawn and recent data shows the recovery in housing and retail demand slowing.

A closer evaluation of the Q4 GDP, reveals that much of the increase in the GDP was due to increased auto production and rebuilding of inventories; at the same time, consumer spending and investments remain weak.

Much of the improvement in Q4 GDP was due to increased auto production and rebuilding of inventories. Consumer spending and business investments remain weak. USD traded higher after release of stronger than expected GDP. The GDP report may have some analysts looking for an earlier FOMC rate hike. The GDP deflator however came out below expectations which suggest that inflationary pressures remain tame despite improving growth.

While the USD may have ended January on a promising note, it is questionable if it can continue its uphill battle and regain some of the previous year’s losses against it major counterparts. The first week of February already promises us some interesting economic action, starting today with the release of Personal Spending expected to increase 0.3% compared with the 0.5% of last month, and the January ISM Manufacturing PMI expected at 55.5 compared to last month’s 54.9. Tomorrow, the US will release its Pending Home sales - expected to remain at the same rate as the previous month. US Dollar traders will have to pay strict attention to any surprises in the Non Farm payroll results, released later this week on Friday.

This week, the US will also be releasing its unemployment claims, followed by the unemployment rate predicted to stay constant at its dismal level of 10%. Its predicted that the US labor market added a net 13,000 jobs throughout the month of January-however, these numbers are notorious for being volatile and very difficult to predict.

Its sufficed to say that USD is in for a risky week- whether or not the dollar manages to hold on tight to its previous week’s gain, all depends on whether this week’s fairly positive predictions transpire.