Today Is A Big Day For Central Banks

Today is a big day for the UK and the eurozone with central bank meetings on the calendar. The Chancellor of the Exchequer delivered his Autumn Statement on the fiscal outlook. The release presents a medium term risk for GBP given its impact on the UK’s credit rating, specifically from Moody’s (Aaa / negative) given the rating agency’s November 14th announcement that they would revisit the UK’s rating and outlook in the first few months of 2013. At the conclusion of the statement the Bureau of Statistics reduced growth forecast for the UK. This leaves currency traders wondering what to expect from today’s BoE meet. Cable showed little reaction and continued to trade close to the 1.61 price level. In Europe, encouraging economic data from China and the US, some comfort with the expectation for a last minute fiscal cliff deal have turned attentions back to the core FX theme – central bank policy and particularly Fed policy – which is likely to see QE3 expanded in December to include Treasuries.

Markets are expecting the ECB to hold rates, the fireworks are expected to fly when Mr. Draghi delivers his statement, and rumors are that Mr. Draghi will revise down growth forecasts for the eurozone for 2012 and 2013.  Draghi will likely reiterate that the ECB is ready to formally launch its aggressive bond-buying program, known as outright monetary transactions, or OMTs, investors shouldn’t look for any new “nonstandard” measures or other special efforts. In other words, Draghi will continue to emphasize that a long-term fix remains the job of politicians

Also weighing on the euro is yesterday’s news that Moody’s was preparing to downgrade Germany weighed only temporarily on the currency. Germany is rated AAA/stable by both S&P and Fitch, with Moody’s holding a negative outlook. We do not expect an imminent downgrade but this could have a strong effect on the euro. . Later in the session, the positive sentiment dissipated on albeit factors that usually wouldn’t have too much impact, but now because of the technical positioning did have more influence. The Spanish bond auction didn’t go very well. The Treasury sold slightly less than the maximum target it had put forward and the pricing wasn’t top either. Admittedly also here, positioning might have been key. Spanish yield had dropped sharply in past weeks

The EUR/USD rally ran out of steam when an important resistance area was approached. Some second tier eco data and events were enough to trigger a modest correction, as short term players felt vertigo and wanted to safeguard their gains. The pair closed at 1.3067, only marginally down from the previous 1.3094 close, but well off the intraday (rally) high of 1.3127. 

With the upcoming US FOMC meeting early next week, the dollar may weaken against the euro as traders are expecting Mr. Bernanke to extend Operation Twist and possibly add some additional stimulus; Friday’s nonfarm payroll report may give traders some indication as to what the Feds will be looking at.

However, if markets want a further excuse to take profit on the recent ERU/USD rally, a downward revision of the ECB staff growth forecast for 2013 can provide it. Sentiment on risk in Europe will probably stay cautiously positive, keeping the euro supported. However, we look out whether European equities will be able to clearly break beyond the 2012 highs. At the same time, sentiment on the dollar remains fragile. The EUR/GBP cross is trading at 0.8111 down in early trading.