Jobs fell 62,000 in June after declines each month so far this year. Job losses were widespread as evidenced by the diffusion index. The unemployment rate was unchanged and remains over 5 percent since March. Hourly earnings continue to moderate so there are reduced wage-push inflation fears. Households and the economy remain in a workout mode.

Employment: Private Sector Job Losses Continue

• Job losses in the private sector have been steady during the first half of this year which suggests weaker industrial production and personal income/consumption growth ahead.
• By sector, manufacturing, construction and retail trade remain weak. The breadth of job losses is reflected in the diffusion index which remains below the 50 break even level.

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Wages Slow, Unemployment Spikes

• Hourly earnings growth has slowed modestly over the last six months which suggests reduced wage-push inflation pressures. Slower earnings suggest reduced inflation concerns at the Federal Reserve.
• Unemployment rates have risen for adult men over the last three months and this suggests a deeper labor market decline.

Wachovia Corporation
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Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

The US stock and bond markets are closed for trading on Friday in observance of Independence Day, but the foreign exchange markets are open.  Although the economic calendar is very light, Canada will be releasing what can typically be a very market moving indicator for the Canadian dollar – IVEY PMI.  The IVEY PMI report measures the country’s manufacturing activity which tends to be a strong leading indicator for growth.

What Are The Markets Facing?

The US stock and bond markets are closed for trading on Friday in observance of Independence Day, but the foreign exchange markets are open. Although the economic calendar is very light, Canada will be releasing what can typically be a very market moving indicator for the Canadian dollar – IVEY PMI. The IVEY PMI report measures the country’s manufacturing activity which tends to be a strong leading indicator for growth. In May, manufacturing activity improved materially with the index rising to the highest level in 11 months. For the month of June, strong wholesale sales and an improvement in leading indicators suggests that manufacturing activity should hold near its highs. Although oil prices hit a new record today, the Canadian dollar has barely reacted as it strengthened against the Japanese Yen but weakened against the dollar. Part of currency’s stubbornness has been concerns that slower US growth would lead to slower Canadian growth. However a strong IVEY PMI report would indicate that the Canadian economy is more resilient than the market thinks, which would be bullish for the CAD. If it falls short of expectations by retracing from its high levels, then those concerns about slower growth will be validated.

Bonds – 10-Year Canadian Government Bond Futures

Canadian Government Bonds have been trading in an increasingly tight range since the middle of May. The last time the Bank of Canada altered interest rates was back in April. The main reason why bonds have barely moved is because the BoC is expected to remain on hold for the remainder of the year. Bond prices however are itching for a breakout with a clear triangle in formation. Resistance is at 117.97 while support lies at 116.75. A good IVEY PMI number could take prices lower and yields higher while a weak number could trigger a break of 117.97.

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FX – CAD/JPY

CAD/JPY would be the biggest beneficiary of a strong IVEY PMI number. The market has turned dollar bullish after it learned that the non-farm payrolls report failed to threaten the current trajectory of Fed monetary policy. This helped to lift USD/JPY as well as the other yen crosses. CAD/JPY has been trapped in a very tight range over the past 4 trading days. A strong IVEY PMI number could take the pair above 105.30, which is the resistance level created by the10 and 20day SMA. A weak number would take CAD/JPY towards the July 1 low of 103.15.

Equities – S&P/TSX Composite Index

The Canadian equity markets have taken a big hit over the past 2 weeks. This has been largely due to the meltdown in the US stock market which dragged global indices lower. Today, Canadian shares recovered significantly after hitting a new 2 month low intraday thanks to the rally in the Dow and the new record in oil prices. If the IVEY PMI figures come in as expected or lower, then the stock market should head towards a support level at 13650. However, implications of stronger than expected PMI should see the market rally towards a near term resistance level at 14400, as participants would interpret the release as signs of sustained growth in the business sector.

Written by Kathy Lien, Chief Strategist and Abhigyan Chakraborty

 Questions? Comments? E-mail klien@dailyfx.com

The second quarter of 2008 marked yet another extended period of consolidation for the British pound as the currency simply range traded between 1.94 and 1.98 for the majority of the time. In fact, the currency ended little changed from the start of April, and for that matter, the beginning of the year! The second quarter started out with a bang as the Bank of England cut the Bank Rate by 25 basis points to 5.00 percent amidst signs of distress in the financial sector and a housing-led economic slowdown in the UK. However, the scenario rapidly became more complex for the UK’s Monetary Policy Committee (MPC) as time went on, as consumer price inflation started to accelerate on the back of surging oil and food costs. As the third quarter begins, the Bank of England is still grappling with these issues, and the future of the British pound will continue to depend upon whether the MPC opts to focus more on the economy and the financial markets or rising price pressures. 

The Bank of England Weighs the Risks

We presented an alternate count last quarter, mentioning that “the decline from 2.0396 is wave X in a larger upward complex correction from 1.9337. Under this scenario, the GBPUSD would exceed 2.0396 before falling hard in the larger C wave towards 1.85.” The alternate has become preferred. The GBPUSD consolidation since 1.9337 is either a flat or triangle. If a triangle, then the pair probably tests 2.02 in wave C of the triangle before completing waves D and E in a tighter range. If a flat, then Cable will exceed 2.04 but reverse ahead of 2.1160. We favor the latter, more bullish count, due to COT positioning and the EURUSD bullish structure.

Activity in the Euro Area’s services sector has failed to grow in June, as the non manufacturing Purchasing managers Index posted a sharper than expected drop from May to June.

Services PMI has declined to 491 in June from 50.6 in May, in a scale that shows expansion of the sector’s activity in levels above 50, and contraction otherwise. June’s reading has come out somewhat weaker than expected as market analysts had advanced a decline to about a 49.5 level.
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The clock is ticking, and the count down has started, the fruit of the week is on the wait, and major events are on the queue, and there is no where to run form this flood, the news will cover all markets, and will affect every single trader; it is just the markets’ judgment day.

The 4th of July Independence Day holiday in the United Stated moved the famous jobs’ report on day earlier, to be just side by side with Trichet press conference that takes place right after the release of the rate decision, creating an incredible duet for markets, as markets are at critical levels all waiting for those event to take a steep direction, and luckily, we have those two events at the same time.

The start will be with the release of the ECB rate decision, who hinted in their last meeting that there will be a slight hike in interest rate to fight inflation which reached to 4% in the euro area, expectations afterwards dominated the markets that we will see a quarter point hike to 4.25%, a step that seems a little bit risky, but as the ECB sees it, very necessary as they want to solve the problem in hand first, which is higher prices, and then deal with others non-shaped problems later, which is slowing growth.

The major concern now is what comes after the decision, what the ECB might say about their future plans for interest rates, and what hints they might give, with oil prices settling today so far above 144$ per barrel, investor will be looking for any word from Trichet to start pricing the next decision and maybe after that, and that’s why we need to stay alert for the words.

And what comes after that is a great market sensitivity to the to all growth data from the Euro Area, the ECB will hike rates today yes, but if we investors see any kind of slowing economic growth after that they will start doubting if the decision was right, and if the ECB has led to economy towards contraction with its stubborn hawkish stand, with complete negligence for growth levels, that’s what we need to keep an eye on today, and for the days to come after the decision.

Moving to the states, where the famous jobs’ report will be the major market mover, not just for the day, but it might create a whole medium term direction in the markets that can keep going for a while, as the jobs’ market is now one of the major concern in the economy, if Mr. Bernanke and his fellas wants to emerge from the crisis they are in with the least damage.

The U.S. economy expectedly shed 60 thousands job in June following a 49 thousands jobs losses in May, and confirming that jobs market might stand as an obstacle in the way of economic recovery. Jobless rate is expected to decline slightly after a two decades high at 5.5% in May to 5.4% due to widened labor market in the United States, while average hourly earnings are expected to increase 0.3% same as last month’s.

Expectations ranged between -20K and -120K, and between 5.2% and 5.6%, those are the odds in the market, while a very big portion expected to see a loss of 40K jobs, but the main issue is, at what numbers we can still consider the jobs market contracting?? Or we can consider it recovering and will allow a faster growth recovery.

Yes, the jobs market is really important, inflation represents a major threat on the U.S. economy now and all the eyes are turned on it, but wait a minutes, yes we saw some improvement in growth levels, and some expansions in some sectors, but if the labor market did not prove to be recovering, then forget about all those theories about escaping recession and hiking rate to fight inflation, the economy will not detour recession by some tax rebates distributed over a couple of months, the economy needs solid and strong labor market, good wages leading to higher spending, which will increase sales and demand factories to produce more, that’s what’s called economic recover, and the start should be from the jobs market, and if not, say goodbye to the rate hike notion, and get prepared to meet a very dear visitor named stagflation.

Today’s data will definitely send markets in a direction, while dollar is losing ground against all the majors, this might be its salvation, as it can be its curse, so be aware dear reader, because were in for a rough ride today

Crown Forex

disclaimer:The above may contain information for investors/traders and is not a recommendation to buy or sell currencies, gold, silver & energies, nor an offer to buy or sell currencies, gold, silver & energies. The information provided is obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. I am not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trading currencies, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, gold, silver &energies presented should be considered speculative with a high degree of volatility and risk.

• US Treasuries modestly higher on eve of key payrolls report
  Treasuries made some further progress and the curve flattened after a weak ADP employment report incited some repositioning and equities sold off and oil rallied. Today’s Payrolls will be of key importance for trading in the next weeks.
• ECB to hike rates today, but what will happen next?
  At today’s meeting, the ECB is widely expected to hike rates by 25 bps to 4.25%. As such, the main question will be what will happen next. In first instance, we expect Trichet to reiterate that this move is not the beginning of a series of interest rate hikes, which may cause some short covering today. In a longer-term perspective, as long as there is no clear sign inflation has peaked, the pressure on yields will remain on the upside.
• Dollar under pressure, as EUR/USD moves above key resistance opening way to highs
  EUR/USD took out key resistance at 1.5845, opening the way for an eventual test of the all time highs in the 1.60 area. For that to happen the ECB probably need to be hawkish and the payrolls weak. However, a weak dollar is undesirable, even for US policymakers. Can they however prevent the nightmare scenario of the dollar making another down-leg?

The Sunrise Headlines

• US equities sell-off, closing sharply lower as oil prices surge to new highs and the ADP employment figures disappoint. Dow slides in ‘official’ bear market territory. Asian stocks mostly lower too, with the noticeable exception of the Shanghai shares.
• Sub-prime crisis hit German IKB bank says sales process entered decisive phase, while Deutsche Bank and UBS say that they don’t need extra capital.
• Crude oil (144.25) surges to new record high (fifth in six sessions) after US inventories fell more than expected and the dollar slid lower.
• Copper (401.50 $) surges higher, closing in on highs, on supply concerns due to a strike in Peru. Soybeans futures (16.51 $) hit new high on worries about unfavourable weather in the US.
• Traders await key ECB decision and US payrolls report as equities, dollar and commodities are at important junctures. The combination of a hawkish ECB and weak payrolls may be lethal for the dollar pushing commodities still further up, stoking inflation concerns and bringing the world economy ever closer to recession. That would also bring ECB in the awkward position that one strike may not enough to safeguard credibility. Will it convince the Fed to raise rates despite economic risks? It would be a novelty in US monetary policy, but is no longer impossible.

Currencies: Dollar Under Pressure, As EUR/USD Moves Above Key Resistance Opening Way To Highs

On Wednesday, EUR/USD made an important step higher, as it broke above key resistance of 1.5840. The break needs confirmation today, as the ECB meeting and the US payrolls will set the sentiment for longer.

Already in early European trade, the pair tested the resistance and the 1.5850 option barrier before receding. It looked a more technical driven move as the pair receded to opening levels, but that changed in the US session, as a weak ADP employment report pushed EUR/USD sustainable higher to a 1.588 intra-day high and a 1.5852 close, up from 1.5792 Tuesday’s close. It happened of course against the background of the ECB meeting that will decide to raise rates today. Equity weakness was a minor supportive factor. While the pair broke above the resistance, the movement didn’t accelerate something one might have expected. This might be due to cautiousness on the part of traders who want to wait for today’s payrolls report and the ECB decision before drawing conclusion. It might also that official sources are active in the market to try to avoid a further slide of the dollar, given its impact on the oil price and inflation.

The dollar is at crossroads. Should the payrolls be weak and the ECB hawkish, the dollar may come under further downward pressure. On the ECB we expect the statement to be hawkish, but Trichet might use the teleconference to soften the message, eventually by repeating that it isn’t the start of a series of rate hikes. However, how credible is this in the current context? Investors will remember that he said the same when he raised rates in December 2005, even if circumstances are different now. A weak payrolls report might still heighten the degree of bearishness in the US equity market, even if we might be close to the capitulation trade that concludes this downleg. Given recent upped concern of G-8 policymakers on the dollar, we cannot exclude some talk/action should the greenback threatens get caught again in a downward spiral.

We have a neutral bias on EUR/USD and assume the pair to extend its sideways trading in the wide 1.6020 to 1.5285 range. Visibility on the economy remains low on both sides of the Atlantic and the Fed and the ECB have very little room of maneuver, as inflation mounts. The ECB is more inclined to take bold interest rate action, which is a short-term positive for the single currency. Technically, EUR/USD trading above the previous short-term highs in the 1.5655-area and now 1.5840/45 is a euro positive and if confirmed today may open the way for a retest of the 1.6020 all-time high. However, we don’t see many convincing fundamental arguments for EUR/USD to move aggressively higher over time and suspect some official interest to prevent more dollar weakness. If the eco situation in Europe continues to deteriorate quickly, markets will start to question the adequacy/ room for aggressive ECB interest rate hikes further out in time and if the ECB would stick to a tough anti-inflationary approach, it might push the economy over the cliff, killing growth and laying the groundwork for a euro decline. Yesterday’s move above 1.5840 puts our ST strategy of a sell-it into the 1.5840 area under pressure. However, it is today that we get the final say on the subject. In this respect, we will re-examine the situation after today.

EUR/USD: above key resistance and painting a double bottom configuration on the charts. If confirmed today, the dollar outlook becomes very concerning once more

Support stands at 1.5845/32 (S1, neckline double bottom/daily envelop), at 1.5818 (S2, STMA), at 1.5774 (S3, Break-up hourly/reaction low hourly) and at 1.5686/72 (S4, key, break up hourly/MTMA).

Resistance is seen at 1.5891 (R1, week high), at 1.5922 (R2, Bollinger top), at 1.5941/62 (R3, daily envelop & weekly envelop) and at 1.6020 (R4, historical high).

The pair is in overbought territory

USD/JPY

On Tuesday, USD/JPY ended very modestly lower at 105.91 from a previous close at 106.13 and the pair still hovers around these levels in range-bound overnight trading. Equities traded positively during the European session, pushing the USD/JPY modestly higher to 106.77, but the tide turned during the US session. The greenback came under pressure following a weak ADP report. Sliding equities later on didn’t help the yen extending its gains

While equities play a somewhat smaller role in yen trading than some time ago, we think that it remains a positive factor. So, today’s reaction on the labour market report will also depend on how US equities react. For more details on the payrolls, see above.

Recently, we turned neutral on USD/JPY. The break of the medium term moving average last Thursday convinced us that the upside is blocked for now. The pair needs a cooling in global market stress and/or a stabilisation/decline in the oil price to resume the gradual uptrend of late. Those conditions clearly are not fulfilled, convincing us to adapt a wait-and-see approach. A re-break above the MTMA (107.06 today) or even better above the 108.58 high is needed to become again more optimistic on the dollar

USD/JPY: little changed yesterday, but downward pressure apparently not over yet

Support stands at 105.79 (S1, today low), at 105.21/17 (S2, reaction low hourly/Bollinger bottomBollinger bottom), at 104.99 (S3, week low/daily envelop), and at 104.43/08 (S4, 9 June low/Starc bottom).

Resistance comes in at 106.39 (R1, daily envelop), at 106-77 (R2, current week high), at 106.96/107.15 (R3, broken weekly uptrendline/broken third trendline), at 107.21/36 (R4, reaction high hourly/break-down hourly).

The pair is in neutral territory

EUR/GBP

After days of boring range bound trading, EUR/GBP yesterday rallied higher, breaking about the top of the sideways range (around 0.7955) to close at 0.7969, the high of the day.

Another batch of weak UK eco data, falling mortgage equity withdrawals and a plunging construction PMI set the tone, but maybe more important was more corporate gloom and doom. M&S reported very weak sales with consequences for profits and Taylor Whimpy, the biggest homebuilders, in serious existential financial difficulties, saw its share price drop more than 50%. Late in the evening new BoE vice governor Bean saw inflation dropping below target as the result of economic weakness.

The result of this horrible news flow was a declining Sterling. Since mid April, EUR/GBP develops a very uninspiring consolidation pattern (0.7766/0.8098). We turned neutral on EUR/GBP recently as an attempt to move higher ran into resistance (0.7955 area) and as the pair shows no trading momentum at all. We hold on to our view that the room for a sustained comeback of the sterling is limited. In a day-to-day perspective, EUR/GBP maintained most of the post Fed gains and now even broke above the 0.7955 resistance. This opens the way to the 0.8033/34 reaction highs. The 0.7831 reaction low remains the first support area on the downside, while 0.7766 is the key range bottom. We continue to see this area as providing strong support.

EUR/GBP on its way to test 0.8033/34 reaction highs?

Support comes in at 0.7955 (S1, neckline double bottom), at 0.7950 (S2, new reaction high), at 0.7937/35 (S3, break-up hourly/daily envelop/ STMA) and at 0.7918/10 (S4, MTMA/reaction low hourly).

Resistance stands at 0.7977/85 (R1, today high/Bollinger top), at 0.7991 (R2, daily envelop) and at 0.8033/34 (R3, 9 June & 21 May highs/neckline potential double bottom).

The pair is in neutral territory.

News

US: Weak ADP employment suggests weak payrolls

The ADP employment report showed higher than expected job losses in June, with the private payrolls falling from a downwardly revised 25K in May to -79K in June. Two sectors were hit hardest: residential construction and financial activities related to home sales and mortgage lending, which shouldn’t be a complete surprise. The outcome suggests that the non-farm payrolls will be around -59K, if we take 15 K public job growth into account, which is in line with the consensus of -60K and shows again the downward trend in the labour market. Nevertheless, in the past months, the ADP employment consistently exceeded payrolls growth, which if repeated would mean a very weak payrolls report.

Factory orders rose 0.6% M/M in May, slightly above the consensus of 0.5% M/M, after rising 1.3% M/M in April. Excluding transportation, new orders rose a more modest 0.4% M/M, which is clearly below the April figure of 2.8% M/M. Most of the raise was due to a 1.3% M/M increase in nondurable petroleum and coal products, while durable orders stayed unchanged. This report shouldn’t be considered as an indication of an improvement in the economy as coal and petroleum products were contributing the most.

EMU: Producer price inflation accelerates

In the euro zone, producer prices rose in May at its fastest pace since series began in 1983. PPI data came out at 1.2% M/M and 7.1% Y/Y, after 0.9% M/M and 6.2% Y/Y in April. Again, the rise in energy prices accelerated (18.2% Y/Y from 14.5% Y/Y). Ex energy prices rose 3.8% Y/Y, against 3.7% Y/Y in April, showing an upward trend, which raises fears that second round effects are showing up.

Download entire Sunrise Market Commentary

Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Australian data once again dominated attention overnight as May’s Trade Balance deficit widened more than economists expected, showing a shortfall of -A$965 million versus a narrow A$12 million surplus in the preceding month. The Australian dollar spiked down 23 pips at the release, though the bears failed to sustain downward momentum and the pair settled back into its post-US session range within 5 minutes. A busy calendar going into the European market open promises volatility as a slew of significant releases culminates in a closely-watched ECB interest rate announcement.

Key Overnight Developments

• Rising Oil Puts Australian Trade Balance Back in Deficit
• Price Growth Stalls for New Zealand Commodity Exports

Critical Levels

Following a break of near-term resistance at 1.5837 to end the US session at 1.5880, the Euro settled in a narrow 30-pip range in Asian market hours. As noted in Jamie Saettele’s
Daily Technical Outlook, the next level of resistance stands at the psychologically significant 1.5900 level. The Pound eased lower to briefly test below the 1.9900 level. A downside break eyes support at the 1.98 level.

Asia Session Highlights

Australian data once again dominated attention overnight as May’s Trade Balance deficit widened more than economists expected, showing a shortfall of -A$965 million versus a narrow A$12 million surplus in the preceding month. The Australian dollar spiked down 23 pips at the release, though the bears failed to sustain downward momentum and the pair settled back into its post-US session range within 5 minutes.

The deterioration was driven by a 6% jump in imports. Fuel imports led the rise, gaining a whopping 17% as oil prices continued to soar. Imports of consumer goods rose a respectable 7.8%, in line with a surprise uptick in May’s Retail Sales figures. As we had noted yesterday, “[the] improvement in retail activity comes in the same month that economy lost -19.7k jobs. While some may interpret this as indicative of Australians’ confidence in finding new employment and thereby make a statement about the resilience of the labor market, it should be noted that some lag is to be expected before job losses translate into reduced disposable income expectations and depress consumption."

The pace of export growth plunged lower nearly seven-fold to show a mere 1.5% expansion since April, when they rose an impressive 10.1%. Exports had suffered in the first quarter as severe rains caused floods that disrupted shipping routes. As weather conditions improved to start the second quarter, producers of coal and iron ore rushed to return to previous shipment levels, boosting export growth rate readings. May’s figures suggest this catch-up leap has leveled off.

Going forward, a decline in consumer demand will likely take some of the steam out of import growth. That said, the oil rally shows no signs of weakness as of yet and fuel costs will likely continue to boost imports in the near term. With a leveling off in export growth, last month’s surprising surplus looks to have been a one-off affair.

New Zealand’s ANZ Commodity Price Index flat-lined in June, showing no change in prices for the island nation’s exports. Policymakers had hoped exports would buttress the economy as domestic demand falters under the weight of rising commodity prices and record-high interest rates. The release failed to stir the market as expectations of overt decline for the economy have already seen the RBNZ signal rate cuts by the end of this year.

Euro Session: What to Expect

A busy calendar promises volatility as a slew of significant releases culminates in a closely-watched ECB interest rate announcement. Things will start off with the UK’s June HBOS House Price Index. Earlier in the week, we saw Nationwide House Prices fall -6.3% in the year to June extending losses from an annualized reading of -4.4% in the preceding month. This suggests we will see the HBOS index decline further after registering at a 15-year low in May. On balance, it would likely take a substantial upside surprise for the metric to stir volatility as continued deterioration in the housing sector will reveal little that has not been priced into the sterling rate already.

Switzerland’s Consumer Price Index is expected to see inflation rise to an annualized 3.1% in June, pushing prices above the SNB’s projected peak at 2.9% this year. The bank left interest rates on hold in June, expecting slower growth to start to tame inflation by the fourth quarter. Some speculation about a one-off rate SNB rate hike had emerged in recent weeks and will surely be amplified if CPI comes in stronger than expected. Inflation spiked to the highest in nearly 15 years in May on surging oil prices. With crude retaining elevated levels throughout June, more of the same is likely on order.

Moving closer to the ECB release, the May’s Euro Zone Retail Sales will update traders on the state of consumer demand following a record-setting decline of -2.9% in the year to April. Rising fuel and food prices had claimed a larger portion of Europeans’ disposable incomes and depressed spending in other sectors. With little changed in commodity price dynamics this time around, it seems unlikely Retail Sales can mount a rebound in the near term.

Finally, the busy session will culminate with the ECB’s Interest Rate Announcement. The market consensus calls for a 25 basis point increase as Jean-Claude Trichet and company fret about rising inflationary pressure. The ECB chief’s hawkish commentary in recent weeks has assured the move is largely priced in. Traders will focus on the subsequent press conference for clues revealing whether the move will be a one-off adjustment or the start of a new tightening cycle. Should Trichet’s wording suggest a one-and-done policy stance going forward, the Euro is unlikely to see much upside momentum. A signal favoring more rate hikes going forward is sure to catalyze the single currency, while the unlikely decision to keep rates at 4% will upset market expectations and set off a collapse in EURUSD. A detailed analysis of how to trade the announcement can he found
here.

To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

What Are The Markets Facing?

There is little doubt in the markets that the European Central Bank will raise rates on Thursday, as ECB President Jean-Claude Trichet remains the most hawkish central banker around. Mr. Trichet sparked expectations of a rate increase following the ECB’s June meeting, as he said during his monthly press conference that the ECB would ‘not exclude the possibility of increasing rates by a small amount.’ Since the ECB’s primary mandate is to maintain price stability, Mr. Trichet has all the reason in the world to consider increasing interest rates as Euro-zone CPI estimates rocketed to a fresh 16-year high of 4.0 percent in June, up from a confirmed rate of 3.7 percent in May. This is substantially higher than the ECB’s 2.0 percent inflation target, and with CPI rising faster by the month, Mr. Trichet and other ECB Governing Council members are understandably concerned. However, traders will need to watch out for the other big show at 8:30 EDT, when Mr. Trichet will give his monthly press conference, as this tends to be the most market-moving part of the ECB’s rate decision. While maintaining price stability will remain high on Mr. Trichet’s list of priorities, his speech will likely signal that the rate hike was a one-and-done deal. Thus, traders should watch for comments that indicate that downside risks to growth may help to offset upside inflation risks, or notes that ‘the current monetary policy stance will contribute to achieving our objective’ of price stability. However, there are other potential scenarios that could play out, which you can read about in our ECB Decision outlook.

Meanwhile, US non-farm payrolls and the unemployment rate will hit the wires at 8:30 EDT as well. NFPs are anticipated to reveal job losses in the US for the sixth consecutive month, while the unemployment rate is anticipated to ease back to 5.4 percent from 5.5 percent. However, US markets may only respond to the economic indicator that yields the greatest surprise factor. For more on the labor market data, check out Kathy Lien’s NFP outlook.

Bonds - 10-Year German Bund Futures

German Bunds continue to consolidate above the one-year lows at 109.66 ahead of Thursday’s ECB rate decision, when the bank is widely expected to hike by 25bps to 4.25 percent. The rate increase could send Bunds plummeting on Thursday, however, if Mr. Trichet suggests that there will be no additional rate hikes in the future, Bunds could subsequently recoup all of their losses and surge toward 111. On the other hand, a rate hike along with hawkish rhetoric by Mr. Trichet could push Bunds below 109.66.

FX - EUR/USD

A bullish run saw the EUR/USD break above resistance at 1.58, opening the door for the pair to target the record highs above 1.60. Looking ahead, EUR/USD faces two mammoth releases: the ECB Rate Decision and US Non-Farm Payrolls. Given current expectations, the news should allow the pair to further its rally. Nevertheless, there are a few factors to consider. While an ECB rate hike would be bullish for the pair, commentary by ECB President Trichet suggesting that tighter policy will not be necessary could actually lead EUR/USD to plunge as a 25bp increase is already priced in. Furthermore, if US NFPs are not quite as bad as expected or if the unemployment rate falls, the pair could fall back to trade near former resistance at 1.58, though sharper declines would take aim on 1.5725

Equities - Dow Jones Industrial Average

Equities market shed early gains on Wednesday as the DJIA clearly broke below support at 11,300 amidst a surge in oil to $144/bbl and downgrades of GM shares from ‘Buy’ to ‘Underperform’ by Merrill Lynch. Given the steep declines in the index, the DJIA could simply consolidate near the recent lows at 11,183, especially since US markets will be closed on Friday for Independence Day. Nevertheless, the release of US labor market data could spark volatility early in the trading session. Market consensus indicates that employment situations are likely to worsen, and if figures fall in line with expectations, bearish sentiment could lead the DJIA to break below near-term support to target 11,042. If, however, the US unemployment rate decreases and payroll figures come in better than expected, the index could recover to rise toward 11,300 once again.

DailyFX

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The Euro is consolidating in levels right above 1.58, Nicole Elliott observes the possibility of a new upmove for the Euro: “One-month at-the-money implied volatility is expected to hold above 9.00% and could move back up to March’s 12.50% if we start holding above 1.5850. For this morning expect an upside test of the 1.5835/1.5850 area, possibly with a squeeze through here to 1.5905.”

Concerning strategy, Elliott advices: “Possibly attempt tiny shorts at 1.5805; stop/reverse above 1.5850 for 1.6000. Short term target 1.5725/1.5700.”
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