BoE holds rates steady, ECB raises by 25bp; Focus on Trichet’s press conference

USD continues to strengthen against most currencies. As rate announcements steal the show EUR and GBP ignore positive data. BoE holds rates and votes for no new QE, ECB raises by 25bp. Expect high volatility during ECB press conference.

Euro still suffers the impact of Portuguese mutlinotch downgrade. Portuguese bonds spreads continue to increase at incredibly rapid pace and reached over 1000 bp. Portuguese CDS rose over 20% over the past few trading sessions.

As the FX market turned focus to rate announcements and ECB’s press conference, economic data releases had only limited impact. UK Manufacturing Production showed volatile prints over the past two months. First if fell by 1.9% which was the worst reading since 10/2009 and then in May it rose by 1.8% which is the best print since June 2010. UK industrial production also improved significantly to 0.9% from previous -1.7%. German Industrial Production in May improved by 1.2% from previous -0.8%.

The BoE kept rates steady at 0.5% and voted to keep Asset Purchase Facility unchanged at GBP 200 bln. As the economy deteriorates, some members of MPC started to mention the possibility of further quantitative easing should situation warrant it. As long as the possibility of new QE exists the Sterling will be under pressure which is intensified by weakening expectations of rate increases. ECB raised rates by 25bp from 1.25% to 1.50% as has been widely expected.

The New York session starts at 8:15 am ET with ADP employment report. Analysts expect an increase to 67K from previous print of 38K. Even if ADP improves a bit, the deterioration since March has been significant.

Market reaction to ADP is likely to be limited as traders will wait for the highly anticipated ECB press conference that starts at 8:30 am ET. This time around, the attention may shift to sovereign debt concerns rather than being solely focused on the monetary policy outlook. J. C. Trichet will prefer to keep more space for future maneuvering so he is somewhat unlikely to use the phrase “strong vigilance on inflation” that often predicates a rate increase in the upcoming month.

Patrik Urban