Talking Points:

Pound to Rise on Status-Quo BOE Result but Follow-Through Likely Limited
Euro Vulnerable as the ECB Faces Mounting Pressure to Boost Easing Efforts
Australian Dollar Outperformed on Supportive Trade Data in Asian Trade

Monetary policy announcements from the Bank of England (BOE) and the European Central Bank (ECB) headline the economic calendar in hours ahead. The UK monetary authority is expected to keep the benchmark lending rate unchanged at 0.50 percent and maintain the size of its asset purchase program at £375 billion, with the focus on possible changes in the forward guidance framework introduced last year. The rate-setting MPC committee has pledged not to consider rate hikes until the unemployment rate drops below 7 percent.

The slide toward this threshold has materialized much faster than policymakers projected. While crossing it won’t necessarily trigger an immediate increase in baseline borrowing costs (as the BOE has repeatedly stated), it will bring the possibility of tightening into the realm of speculation and mark a hawkish shift from the policy status quo. With this in mind, opting to keep guidance as-is could be interpreted as borderline supportive for the British Pound, though near-term follow-through may be limited until traders are able to review the basis for the decision in the Quarterly Inflation Report due to be published next week.

Meanwhile, the ECB is under pressure to deliver additional easing as disappointing CPI data and sinking inflation expectations feed deflation fears and challenge the central bank’s mandate to maintain price stability. The headline year-on-year inflation rate registered at 0.7 percent in January, matching a four-year low registered in October 2013. That print prompted an interest rate cut, but this proved ineffective and so seems unlikely to be repeated this time around.

This opens the door for Mario Draghi to try their hand at non-conventional policy options. Negative deposit rates, another round of LTROs (augmented to ensure policy transmission into the real economy) or a direct-lending program similar to the BOE’s FLS scheme have been tipped as possible alternatives. The outright introduction of additional stimulus at today’s announcement or hints of its near-term emergence at the ECB President’s press conference following the sit-down are likely to weigh on the Euro and we remain short EURUSD.

The Australian Dollar outperformed in overnight trade, rising as much as 0.8 percent against its US namesake. The rally followed an impressive Trade Balance report that unexpectedly produced an A$468 million surplus in December, the best reading in two years. The outcome helped ward off the possibility of further interest rate cuts, building on rhetoric advanced at this week’s RBA monetary policy meeting. A Credit Suisse gauge tracking investors’ priced-in 12-month monetary policy outlook rose to a two-month high after the trade figures crossed the wires.

New to FX? START HERE!

Asia Session

GMT

CCY

EVENT

ACT

EXP

0:30

AUD

Trade Balance (A$) (DEC)

468M

-200M

83M

0:30

AUD

Retail Sales s.a. (M/M) (DEC)

0.5%

0.7%

0:30

AUD

Retail Sales ex Inflation (Q/Q) (4Q)

0.9%

1.2%

0.8%

0:30

AUD

NAB Business Confidence (4Q)

–

2:00

JPY

Tokyo Avg Office Vacancies (JAN)

7.18%

–

7.34%

European Session

GMT

CCY

EVENT

EXP/ACT

IMPACT