Two major central bank interest rate decisions are just around the corner, which means that we’ve got two good opportunities to earn some pips. Let me fill you in on what to expect so you can get ready for battle and arm yourselves with the knowledge to make pips from these major market events tomorrow.
BOE to increase asset purchase facility from 325B to 375B GBP
In Q1 2012, the U.K. economy contracted by another 0.3% after it had shrunk 0.4% the previous quarter. The two consecutive quarters of negative growth effectively puts the U.K. in a technical recession.
If that isn’t enough bad news, early data for Q2 2012 suggests that the economy may have contracted for a third successive quarter! The U.K. also faces external threats to growth as the European debt crisis gets worse.
This has increased the pressure on the Bank of England (BOE) to do something. With interest rates already at a lowly 0.50%, the only choice left for the BOE is to increase its asset purchase facility. In fact, in the latest MPC meeting minutes, 4 out of the 9 voting members opted to implement more stimuli.
It’s not as if the BOE has no room to ease anyway. Thanks to lower fuel prices, inflation worries have subsided greatly over the past few months. The country’s CPI has fallen to just 2.8% in May, down from 3.5% in March. May’s inflation rate is also the lowest in more than 2 years.
If the BOE chooses to increase its quantitative easing program by the market’s expected 50 billion GBP, it could lead to a sharp drop in GBP/USD. However, if the central bank goes for a smaller amount (or decides not to expand at all), GBP/USD could actually end up rallying.
ECB to slash rates from 1.00% to 0.75%
There is a dire need for a boost – any boost! – in the euro zone. Growth in the region is dying, unemployment is rising, confidence is falling, and the debt crisis is still well underway and far from being resolved.
Yeah, the economy did show signs of strength in the first quarter of the year, but the second quarter was anything but impressive. As a matter of fact, some reports indicate that the euro zone may have slipped back into recession last quarter.
Recent composite PMIs seem to suggest that real GDP may have contracted by 0.2%-0.3% in Q2 2012. With numbers like that, it’s no wonder why many see the European Central Bank (ECB) taking action to support the economy in its rate decision tomorrow.
From the looks of it, the ECB will probably select a rate cut as its weapon of choice. The last time the ECB held its rate decision, ECB President Mario Draghi rejected the idea of more LTROs, so it’s unlikely that the ECB will take that course of action this time around.
On the other hand, a reduction in interest rates (from 1.00% to 0.75%) seems more likely since it was already on the table the last time the ECB met, and some policymakers have already dropped hints that it is what they prefer.
The thing to keep in mind when trading this event is that markets have been dying to see some form of support from the ECB. That being the case, investors will probably celebrate and buy up the euro if Draghi announces a rate cut.
But if the ECB decides to leave its monetary policy unchanged again, it will probably leave markets sorely disappointed and lead to big losses for the euro.