For the first half of 2011, the major themes that have been driving the forex market is central bank rhetoric and interest rate decisions. If you’ve been up to speed with your fundamentals classes in the School of Pipsology, then you’d know that higher interest rates create more demand for a currency. After all, what else could drive the euro higher, even with all the euro zone’s sovereign debt problems?!
With that said, we’ve got not one, not two, but THREE interest rate decisions coming up later this week!
Reserve Bank of New Zealand (RBNZ)
After raising rates throughout 2010, the RBNZ took a step back last March and cut rates by 50 basis points. No surprises here – the country was hit with a massive earthquake earlier this year, and lower rates would help support the recovery.
However, recent data from New Zealand has been quite upbeat. The trade surplus came in at a scorching hot 1.1 billion NZD, almost double the expected 603 million NZD. This was primarily driven by export growth, which soared 17.4% in April.
The NBNZ survey also showed that business confidence is up, as it printed at 38.3, climbing 24.1 points above the previous release. Meanwhile, inflationary pressures are starting to pick up as well. Experts expect inflation to rise to 3.0% over the next two years, an increase from the previous estimate of 2.6%, testing the upper band of the RBNZ’s inflation target.
Errr… probably not. Chances are that the central bank will stick to its plan and won’t be raising rates later at 9:00 pm GMT. Expect RBNZ Governor Alan Bollard to express caution in the accompanying statement and that the RBNZ will most likely want to go with a wait-and-see approach going forward.
Bank of England (BOE)
Next up, BOE Governor Mervyn King and his men are set to announce their rate decision on Thursday 11:00 am GMT. Recall that the BOE held off on any changes in their monetary policy during their previous rate statement in May. According to King, they just couldn’t ignore the signs showing that the economic recovery is losing steam.
Policymakers could echo the same downbeat tune during this upcoming statement. If you kept tabs on the economic data released from the U.K. last week, you’d know that both the manufacturing and services PMIs posted declines for May and came in much worse than expected. Governor King did acknowledge during their inflation hearings that there are still plenty of downside risks to growth.
However, he also mentioned that their benchmark rate will need to rise at some point. Could he be referring to the upcoming BOE rate decision? While the market consensus is that the central bank will keep rates on hold at 0.5%, the U.K.’s above target inflation could push the BOE to implement a rate hike soon. After all, their inflation rate currently sits at 4.5%, which is more than twice as much as their 2% target!
European Central Bank (ECB)
A couple of months ago, the ECB surprised the markets by hiking interest rates from 1.00% to 1.25% in line with their commitment to ward off inflation. In their rate decision the following month, they decided to keep rates on hold as ECB President Jean-Claude Trichet expressed concern over resurfacing debt problems in the euro zone.
Will they return to their rate-hiking ways this June? Expectations are that they’ll keep rates steady since recent euro zone figures haven’t been on the up and up. For one thing, economic confidence in the region slumped for the third consecutive month in May. Inflationary pressures have also subsided as the flash report clocked in a 2.7% increase in May, a notch lower than the 2.8% rise recorded in the previous month.
Still, if ECB policymakers emphasize their “strong vigilance” against inflation, traders could keep their hopes up for a rate hike in the coming months. Of course any upward revisions in the ECB’s growth and inflation forecasts could bring the central bank one step closer to a rate hike. I’ll be tuning in to their accompanying statement, that’s for sure!
Now, even though all these banks are most likely to keep rates at current levels, it is still important to do your homework and READ the accompanying statements. Their carefully chosen words could signal whether they are more hawkish or dovish and what direction they will be moving in.
If you need some help interpreting what is said, make sure to check out Pip Diddy’s daily forex fundamentals. He’s a talkative fellow and he’s more than willing to give you the low down on what was said!