Forex: Euro, British Pound To Face Range-Bound Price Action Ahead Of Rate Decisions

The Euro retraced the overnight decline to 1.4762, but the rebound in the single-currency may taper off going into the North American trade as the exchange rate maintains the narrow range from the end of the previous week.

Talking Points

• British Pound: BoE King To Testify
• Euro: ECB To Hold Rate Steady In May
• U.S. Dollar: ISM Manufacturing On Tap

The Euro retraced the overnight decline to 1.4762, but the rebound in the single-currency may taper off going into the North American trade as the exchange rate maintains the narrow range from the end of the previous week. Hawkish comments from the European Central Bank propped up the EUR/USD coming into May, and the Governing Council may continue talk up speculation for borrowing costs as it toughens its stance against inflation. Bundesbank President Jens Weidmann, the new replacement to Axel Weber, pledged to carry out the central bank's mandate on price stability while delivering his first speech in Frankfurt, and went onto say that one of his key objectives will be ‘a return to monetary policy normality' as he aims to closely follow the inflation-targeting path taken by his predecessor.

As 7 of the 23 seats in the Governing Council are scheduled to change hands this year, market participants speculate the new breed of hawkish policy makers will promise higher interest rates across Europe. However, President Jean-Claude Trichet may continue to soften his stance against inflation before his departure in 2011 as the sovereign debt crisis threatens the economic recovery in the region. Mr. Trichet said that the ECB has ‘solidly' anchored inflation expectations while delivering a speech at the Bundesbank, but warned that the ‘crisis is not over' as the record-high financing costs faced by the European periphery heightens the risk for contagion. According to Credit Suisse overnight index swaps, investors are still pricing a zero percent chance for a 25bp rate hike this week, and we may see a near-term correction in the EUR/USD if the central bank head continues to talk down speculation for another rate hike in the first-half of 2011. In turn, the euro-dollar may hold steady ahead of the May 5 rate decision, and the press conference with ECB President Trichet is likely to dictate future price action for the single-currency as the central bank is widely expected to hold the benchmark interest rate at 1.25% this month.

The British Pound bounced back from a low of 1.6642 to maintain the narrow range from the previous week, and the exchange rate may trend sideways throughout the first-half of the week as the Bank of England is scheduled to announce its interest rate decision on Thursday at 11:00 GMT. However, currency traders may show a muted reaction to the announcement as we expect the central bank to refrain from releasing a policy statement yet again. In turn, the GBP/USD may face range-bound price action until the BoE delivers its quarterly inflation report on May 11 at 9:30 GMT. However, as BoE Governor Mervyn King is scheduled to testify in front of the EU Parliament later today, comments from the central bank head is likely to spark increased volatility in the exchange rate, but Mr. King may avoid touching upon monetary policy ahead of the rate decision later this week.

The U.S. dollar bounced back against most of its major counterparts on Monday, with the USD/JPY rallying to a high of 81.68, but the greenback may struggle to hold its ground during the North American trade as the economic docket is expected to reinforce a weakened outlook for future growth. The ISM Manufacturing index is projected to fall back to 59.5 in April from 61.2 in the previous month, and the slower pace of expansion could bear down on the exchange rate as the Fed maintains a cautious outlook for the region. At the same time, market participants will certainly keep a close eye on the ISM's employment component as we have the highly anticipated Non-Farm Payrolls report due out on Friday, and a slower pace of labor growth could foster a bearish outlook for the USD as the central bank maintains a dovish tone for monetary policy.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	14:00	10:00	ISM Manufacturing (APR)	59.5	61.2
USD	14:00	10:00	ISM Prices Paid (APR)	83.0	85.0
USD	14:00	10:00	Construction Spending (MoM) (MAR)	0.3%	-1.4%

Currency	GMT	Release	Expected	Actual	Comments
GBP	23:01	Hometrack Housing Survey (MoM) (APR)	--	0.0%	Largest contraction since October 2009.
GBP	23:01	Hometrack Housing Survey (YoY) (APR)	--	-3.3%
AUD	23:30	AiG Performance of Manufacturing Index (APR)	--	48.4	Contracts for second month.
AUD	0:30	TD Securities Inflation (MoM) (APR)	--	0.3%	Falls back from a three-month high.
AUD	0:30	TD Securities Inflation (YoY) (APR)	--	3.6%
NZD	1:00	ANZ Commodity Price (APR)	--	1.6%	Rises for eight straight months.
AUD	1:30	House Price Index (QoQ) (1Q)	-0.5%	-1.7%	Biggest decline since 3Q 2008.
AUD	1:30	House Price Index (YoY) (1Q)	1.6%	-0.2%
JPY	1:30	Labor Cash Earnings (YoY) (MAR)	--	-0.4%	First decline since February 2010.
JPY	5:00	Vehicle Sales (YoY) (APR)	--	-51.0%	Biggest contraction since the series began in 1980.
AUD	6:30	RBA Commodity Price Index (APR)	--	106.1	Highest since February 2009.
AUD	6:30	RBA Commodity Index SDR (YoY) (APR)	--	32.3%
CHF	7:15	Retail Sales (Real) (YoY) (MAR)	--	-0.2%	Declines for the second time in 2011.
CHF	7:30	SVME-Purchasing Managers Index (APR)	59.8	58.4	Slows for the second month.
EUR	7:45	Italian PMI Manufacturing (APR)	56.0	55.5	Fastest pace of expansion heightens speculation for higher interest rates in Europe.
EUR	7:50	French PMI Manufacturing (APR F)	56.9	57.5
EUR	7:55	German PMI Manufacturing (APR F)	61.7	62.0
EUR	8:00	Euro-Zone PMI Manufacturing (APR F)	57.7	58.0
EUR	8:00	Italian Hourly Wages (MoM) (MAR)	0.1%	0.2%	Expands for the second time this year.
EUR	8:00	Italian Hourly Wages (YoY) (APR)	2.0%	2.0%
CAD	12:30	Industrial Product Price (MoM) (MAR)	0.7%	0.9%	Rises for eight straight months.
CAD	12:30	Raw Materials Price Index (MoM) (MAR)	2.5%	5.7%	Biggest expansion since June 2009.