'Baked in the the cake' - US dollar on the offensive as traders weigh up the risks of the ECB cutting harder than expected

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Published on Wednesday, 04 July 2012 14:48

Written by Sam Coventry

International Money Transfers at our sister site

"While our base scenario is for a 25 bps cut in the refi-rate, a 12.5 bps cut in the deposit rate, the risks are clearly for a bigger rate cut" - KBC Markets.

The US dollar (Currency:USD) is the 'horse to back' today as markets snap a two-day winning streak. "We are seeing clients cut positions after poor economic data from the region, while a dearth of volumes due to a closed US market (for Independence Day) has left markets rather directionless," says Ishaq Siddiqi at ETX Capital.

Of course this defensiveness plays into the hands of the US currency:

The pound dollar exchange rate is 0.46 pct down on Tuesday nights close at 1.5617. The euro dollar exchange rate is 0.4 pct lower at 1.2558.

(We publish the latest FX forecasts on our IMT site, by clicking through this Facebook entry path you are able to gain access and receive updates).



"Furthermore, the recent risk rally across global markets appears to be alluring clients into booking some profits. Today’s price-action is likely to continue until the ECB and BOE policy decisions tomorrow. Some traders just don’t like to be fully exposed to events which might be changing the current trend in a major way, so would rather prefer to get in later at a less favourable price but with much lower risk," says Siddiqi.

Investors are expecting a rate cut of sorts to come out of the ECB tomorrow. What will be key for euro dollar direction is by how much it deviates from expectations.

A note on the matter from KBC Markets in Belgium explains just how markets will be approaching the issue:

"Recent economic and market developments, the EMU Summit and some comments of ECB policymakers have strengthened our belief that an easing of policy is baked in the cake. It is by now also the market consensus.

"The consensus expects a 25 bps cut in the refi-rate to 0.75%, with some analysts counting on an unchanged outcome and a few (5 out of 62) betting on a 50 bps rate cut. While our base scenario is for a 25 bps cut in the refi-rate, a 12.5 bps cut in the deposit rate, the risks are clearly for a bigger rate cut."