BOE, ECB Expected To Leave Rates Unchanged
The ECB announces its rate decision tomorrow at 7:45am EST and is widely expected to leave its benchmark unchanged at 4%. The 3-month Euribor contract shows a dovish bias with an implied rate of 4.17%. This implied rate has trended lower since the beginning of this year despite hawkish comments from seemingly every ECB official.
Indeed, the ECB has maintained its inflationary vigilance and has promised to combat “second round” effects. Recent economic data in the EU has been relatively soft and has not reflected the marked deceleration in the US; however with credit market issues ongoing and the fallout from the US slowdown unknown, the ECB medium-term rate path is unclear.
ECB president Trichet is likely to reinforce his position as a hawk following the rate decision. Upside potential for EUR/USD may be limited by its recent surge to 1.53.
The BOE is also expected to leave it benchmark unchanged at 5.25% when it announces rates at 7:00am EST tomorrow. Interest rate futures in the UK are showing a hawkish near-term bias with a dovish bias in the medium term. The UK economy has been resilient in facing credit market issues and has indicated minimal collateral damage from the US downturn.
The BOE is cagier than the Fed and ECB in regards to monetary policy, leaving the potential for a surprise hike or cut — but this appears to be highly unlikely.