Mid-Day Report: Forex Markets Steady after Rate Cuts from ECB and BoE

Market Overview | Written by ActionForex.com | Dec 04 08 14:34 GMT |

The forex markets remain rather steady after massive rate cuts from ECB and BoE. Dollar index climbs to 87.68 earlier today but fails to sustain gain and retreats in early US session. Euro remains mixed despite the largest than expected rate cut from ECB, with EUR/USD recovering from earlier dip. Sterling recovers mildly but remains generally pressured across the board. Though, stocks's lower open might give risk aversion and the Japanese yen a mild boost. ECB surprised the markets by delivering the largest ever rate cuts by 75bps today, bringing the benchmark interest rates down from 3.25% to 2.5% while economists generally expected a 50bps cut. ECB revised down GDP growth forecasts and expect that it could be negative in 2009. Inflation is expected to slow to below ECB's target to 1.1-1.7% in 2009 before climbing back to near to the banks' 2% target in 2010. In details, 2008 GDP forecasts was revised down to 0.8% to 1.2% (vs. prior range of 1.1%-1.7%). 2009 GDP forecasts was revised down to -1.0% to 0.0% (vs. prior range of 0.6%-1.8%). 2008 inflation revised to 3.2% to 3.4% (vs prior range of 3.4% to 3.6%). 2009 inflation is expected to be at 1.1% to 1.7% while 2010 inflation is expected to be in range of 1.5% to 2.1%. BoE cut its key rate by 100bps to 2.00%, lowest since 1951, inline with market expectations. In the rather lengthy accompanying statement, BoE noted that " business surveys have weakened further and suggest that the downturn has gathered pace,". Then bank said that consumer spending and business investments have "stalled". Activity indicators in the rest of the world have weakened too. Note that since MPC warned of a "substantial" risk that inflation would undershoot the target range of 2-3%. It's still expected that the current easing cycle is not over yet. Focus will turn to the MPC minutes to be released on Dec 17. More on BoE here Data released from US saw initial jobless claims dropped slightly to 509k. However, continuing claims rose to 4.09m, largest since 1982. Canadian busing permits dropped more than expected by -15.7% in Oct. From UK, Halifax house price sank -2.6% (consensus: -1%) in November. October's figure was revised down to -2.4% from + 2.3%. Year on year, house prices have declined 14.9% from 13.7%. The average house price stood at 163 605 pounds, the lowest level since July 2005 but still higher than 90 000 pounds in November 1998. Finalized 3Q GDP in Eurozone came in at -0.2%, same as preliminary number and that in 2Q. Two consecutive months of contractions have brought the 15-nation economy in recession. Readings of investments dropped 0.6% while exports and imports grew by 0.4% and 1.7% respectively. Year on year, GDP was 0.6%, lower than the 0.7% initially reported and the 1.4% in last quarter. Switzerland's third quarter GDP was, as expected, flat while the growth in the second quarter was revised down to 0.2% from 0.3%. Private consumption and public consumption rose 0.3% and 0.7% respectively. Economic condition in the nation was, although better than other European economies, slowing down very quickly. Other data such as PMI and KOF leading indicators echoed this phenomenon. On annual basis, the 3Q GDP was below consensus at 1.6% and the 2Q figure was however raised to 2.6%. Japan's Q3 business capex declined for the 6th quarter to 13%, worse than consensus of -10% and -6.5% in Q3. As corporate investment accounts for approximately 15% of the nation's GDP, it's likely for the Government to revise down Japan's Q3 GDP whose preliminary figure (-0.1%) has already displayed a second quarter of contraction. Australia's October trade balance came in at A$2.952B, brought by a strong increase in non-rural goods exports such as minerals and metal ores. The figure beat market expectation of A$ 1.41B and was more than doubled the downwardly revised A$1.25B in September. RBNZ lowered the OCR by 150bp to 5% overnight. The move was consistent with consensus and pushed the interest rate to the lowest since early 2004. More on RBNZ here. EUR/JPY Mid-Day Outlook Daily Pivots: (S1) 117.19; (P) 118.23; (R1) 119.66; More. EUR/JPY remains solft and continues to press 116.47 support. At this point, intraday bias remains on the downside as long as 119.44 minor resistance holds. Break of 116.47 support will bring retest of 113.63 low first and break there will confirm that medium term down trend has resumed. On the upside, though, above 119.44 will turn intraday outlook neutral again. Further break of 126.24 will indicate that corrective rise from 113.63 is in progress to 131.02 or above before completion. In the bigger picture, as discussed before, whole down trend from 169.96 is still expected to continue after completing consolidation from 113.63. Break of this low will confirm that such fall has resumed and should target 76.4% retracement of 88.97 to 169.96 at 108.08. However, note that as long as 113.63 low holds, consolidation from there might still continue. But upside is expected to be limited below 141.73 cluster resistance (50% retracement of 169.96 to 113.63 at 141.79) to complete the correction.