Euros overnight oscillating between 0.5 and 0.3 percent

Interest rate announcements from the European Central Bank and the Bank of England headline the economic calendar in European hours. While both monetary authorities are expected to keep policies unchanged, the UK announcement presents a greater potential for volatility versus its continental counterpart.

BOE Governor Mervyn King has done everything in his power to project a dovish bias since the last rate decision, telling the House of Commons Treasury Committee that policymakers are considering cutting the interest rate they pay on bank deposits to encourage lending and talking down the currency with assertions rebalancing the UK economy was “very necessary [and] the fall in the exchange rate that we have seen will be helpful to that process” in an interview with The Journal. We had speculated ahead of the September 10 rate announcement that the bank was preparing the markets for a change in policy after the asset-buying scheme largely failed to affect lending to the real economy. Indeed, although King has said that the BOE was “beginning to see its impact on the supply of broad money,” the M4 measure of money stock grew at an annual pace of just 12.6% in August, the slowest in a year, while central bank’s own data showed net lending shrank for the first time in at least 16 years in July. While a policy shift had not materialized at that point, the BOE has not let up on hinting that more, not less, monetary easing is ahead despite the recent uptick in leading economic indicators, creating the distinct possibility for a dovish surprise this time around.

Turning the ECB, traders are likely to pay little attention to the actual interest rate decision. In fact, the ECB benchmark (officially unchanged at 1% since May) has not been representative of actual lending rates for some time, with the average cost borrowing Euros overnight oscillating between 0.5 and 0.3 percent since June. Rather, traders will focus on bank President Jean-Claude Trichet’s post-announcement press conference. Key economic data turned in mixed results in recent weeks but the bottom line looks far from encouraging: consumer prices fell more than expected in September, lending to the private sector grew at the slowest pace on record in August, and updated GDP figures revealed that the economy depended more on government spending while consumption and investment shrank at a faster pace than originally expected in the second quarter. While Trichet and company have consistently signaled that rates will remain unchanged well into next year, the steady upward drift in traders’ 1-year yield expectations over the past two months suggests the markets will be disappointed if a hawkish streak does not begin to show itself in the near term, weighing on the Euro.