FOREX: Euro Volatility Likely Amid Mixed Cues Ahead of ECB Rate Decision

The Euro is likely to turn volatile as the ECB delivers its interest rate decision as conflicting indicators cloud the outlook for monetary policy over the coming months.

Overnight Headlines

• New Zealand Dollar Gains on Unexpectedly Rosy Jobs Report
• Australian Dollar Sold on Disappointing Retail Sales Figures
• Euro, British Pound Rise Ahead of ECB and BOE Rate Decisions

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.4790	1.4938
GBPUSD	1.6456	1.6578

The Euro and the British Pound advanced in overnight trade, adding as much as 0.3 percent each against the US Dollar ahead of the upcoming policy announcements from the European Central Bank and the Bank of England, reflecting expectations that both monetary authorities will move faster to hike interest rates than the Federal Reserve. EURUSD has stalled having taken out important resistance while GBPUSD is perched at a critical support level.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
22:45	NZD	Unemployment Rate (1Q)	6.6%	6.7%	6.7% (R+)
22:45	NZD	Participation Rate (QoQ) (1Q)	68.7%	68.1%	67.9%
22:45	NZD	Employment Change (YoY) (1Q)	1.8%	0.8%	1.3%
22:45	NZD	Employment Change (QoQ) (1Q)	1.4%	0.6%	-0.4% (R+)
1:30	AUD	Building Approvals (MoM) (MAR)	9.1%	5.0%	-5.3% (R+)
1:30	AUD	Retail Sales s.a. (MoM) (MAR)	-0.5%	0.5%	0.8% (R+)
1:30	AUD	Retail Sales ex-Inflation (QoQ) (1Q)	0.0%	0.6%	-0.4% (R-)
1:30	AUD	Building Approvals (YoY) (MAR)	-18.1%	-25.2%	-13.3% (R+)
2:30	CNY	China HSBC Services PMI (APR)	51.6	-	51.7

The New Zealand Dollar outperformed in overnight trade, adding as much as 0.6 percent on average against its top counterparts after first-quarter Employment figures proved unexpectedly rosier than economists had forecast. Jobs swelled by 1.4 percent from the previous quarter, marking the strongest outcome in four years, while the Unemployment Rate dipped lower to 6.6 percent.

Meanwhile, the Australian Dollar was broadly sold following a disappointing Retail Sales report. Receipts tumbled 0.5 percent in March, marking the first decline in five months and weighing on interest rate hike expectations. Indeed, a gauge of monetary policy expectations derived from 2-year bond yields dropped 3.5 basis points, erasing most of yesterday's advance in the aftermath of a mildly hawkish RBA policy statement.

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:00	CHF	Foreign Currency Reserves (APR)	-	206.2B	Low
8:30	GBP	Purchasing Manager Index Services (APR)	56.0	57.1	Medium
8:30	GBP	Official Reserves (Changes) (APR)	-	$2253M	Low
10:00	EUR	German Factory Orders n.s.a. (YoY) (MAR)	15.4%	20.1%	Low
10:00	EUR	German Factory Orders s.a. (MoM) (MAR)	0.4%	2.4%	Low
11:00	GBP	Bank of England Rate Decision	0.5%	0.5%	High
11:00	GBP	Bank of England Asset Purchase Target	200B	200B	Medium
11:45	EUR	European Central Bank Rate Decision	1.25%	1.25%	High

The Bank of England is expected to hold elements of monetary policy – benchmark interest rates and the asset-purchase target – unchanged once again at today's meeting. Given the central bank's penchant to stay mum after the announcement, the news may amount to a non-event as traders look for more substantive clues to shape their outlook for the months ahead. With that in mind, next week brings the updated quarterly Inflation Report while the following week will see the publication of minutes from today's sit-down, a critical bit of information to help investors gauge the evolving voting pattern on the rate-setting MPC.

An interest rate decision from the European Central Bank ought to prove far more eventful. Although Jean-Claude Trichet and company are expected keep rates on hold this time around, the ECB President's press conference following the meeting will be of utmost importance as markets size up the path of monetary policy going forward. Indeed, the Euro has been at near-standstill for the past five days in anticipation of the event. The promise of “strong vigilance”, either in the statement or the subsequent Q&A session, would arguably point to another rate hike as soon as June and amount to a relatively hawkish, Euro-supportive outcome.

Conflicting cues abound ahead of the ECB announcement. On one hand, credit crisis fears are fading out of focus, with the average cost of insuring against a default in any of the so-called “PIIGS” countries falling to the lowest in two weeks after Portugal reached an agreement with EU officials on the terms of its 78 billion euro bailout on Tuesday. Meanwhile, headline CPI inflation hit a 30-month high at 2.8 percent in April, arguing for action from policymakers. On the other, a gauge of inflation expectations derived from bond yields has been tracking lower since peaking in early April and now stands at the lowest in a week.

While the former environment points to an environment able to absorb a rate hike, the latter suggests that such a move is unnecessary. Indeed, the markets see inflation at just 2.1 percent in five years, hinting expectations are firmly anchored at the ECB's target. On balance, little can be said with certainty at present save that plenty of sharp volatility is likely to surround the release as it crosses the wires.

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