Australia’s Trade Balance surprised sharply to the downside in July as oil imports surged 29%. The Euro recovered some ground in overnight trading, trying for a return above the 1.45 level. The forthcoming European session will see forex traders focused on interest rate announcements from the Bank of England and the European Central Bank.
Key Overnight Developments
• Australian trade deficit soars in July as oil imports surge 29%
• The Euro recovered, testing 1.45 in overnight trading
Critical Levels
The Euro recovered some ground in overnight trading, trying for a return above the 1.45 level. DailyFX Senior Currency Strategist Jaime Saettele sees the possibility of rally back above 1.49 before the downtrend resumes. Near term support stands at 1.4440 while resistance is established at 1.4555. Sterling continued to remain under pressure, though downside momentum appeared to be losing steam. Support is seen at 1.7673, with resistance at 1.7845.
Asia Session Highlights
Australia’s Trade Balance surprised sharply to the downside, issuing a deficit of –A$717 million in July versus expectations of a $A50 million surplus. An uptick in fuel imports accounted for the reading as inbound oil shipments surged 29%. Meanwhile, exports were seen lower as outbound agriculture shipments eased -3% while those of coal fell -9%. The Australian dollar fell 31 pips against its US counterpart in the first 5 minutes following the release but quickly recovered as traders took stock of what the metric actually means for the economy going forward. Indeed, the market is already pricing in substantial rate cuts from the Reserve Bank of Australia in the coming months, so deterioration in the antipodean nation’s trading terms is largely a moot point.
Euro Session: What to Expect
The forthcoming European session will see forex traders focused on interest rate announcements from the Bank of England and the European Central Bank. The long-term bias favors rate cuts for both monetary authorities as softer crude oil prices allow for moderation in the outlook for inflation all the while economic growth flounders in the UK and the Euro Zone.
Focusing on today’s announcements, a comparison of recent commentary casts the BOE as decidedly more dovish. As reported by DailyFX Strategist Terri Belkas, the Bank of England’s perennial rate cut advocate David Blanchflower appears to have picked up support for his worldview from Chancellor of the Exchequer Alistair Darling. In an interview with the Guardian newspaper over the weekend, Darling said that UK economic conditions “are arguably the worst they've been in 60 years” and that the slowdown may be “more profound and long-lasting than people thought.” Blanchflower has voted for rate cuts in 12 of the last 18 BOE policy meetings. Most recently, he said that “The fears that I have expressed over the last six months have started to come to fruition… We are going to see much more dramatic drops in output. The way to get out of it is to act, by interest rate cuts and fiscal stimulus.”
Commentary from the ECB President Jean-Claude Trichet has revealed continued reluctance to act on rates. Alluding to persistently elevated readings in several key inflation gauges, Trichet has noted that although crude trades lower, there remains lingering price pressure “in the pipeline [which] undoubtedly creates more risks.” Indeed, Euro Zone Producer Prices registered at an annualized 9.0% in July, the highest in 24 years. That said, economic growth concerns are just as real: yesterday saw Euro Zone Retail Sales fall a greater-than-expected -2.8% in the year to July, the second-lowest result in 12 years.
Bond yield forecasts bear out the greater urgency on the part of the BOE, though neither central bank is expected to yield a rate cut in today’s announcement. The market pricing in the BOE to start cutting rates in the fourth quarter of this year while the ECB remains on hold until the first quarter of 2009.
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