We at ForexYard always encourage our customers to get involved in the most intense market events. For this week, we believe it necessary that our traders know that interest rate decisions for the GBP and EUR are due Thursday at 11:00 and 11:45 GMT, respectively. Also, the U.S. Non-Farm Employment Change report is expected on Friday, May 8th, at 12:30 GMT, and you need to be prepared!
What are the European Interest Rate Figures?
Expected to be released on Thursday are the target interest rates of the Bank of England (BoE) and European Central Bank (ECB). These are called the Official Bank Rate and Minimum Bid Rate, respectively.
These figures are each released monthly, usually during the first week of the month. They are important because short-term interest rates are the leading factor in determining the value of a currency. In fact, most other economic indicators are used by traders to speculate about the future movement of these interest rates.
The British Official Bank Rate is decided on by the Monetary Policy Committee (MPC) of the BoE. The Euro-Zone Minimum Bid Rate is decided on by the 6 members of the ECB as well as the central bank governors from each of the 16 nations in the European Monetary Union (EMU). According to the needs of each respective economy, the banks will elect to increase, decrease, or leave the rates unchanged. Traders pay close attention to these figures as they have a strong correlation with the value of the GBP and EUR.
If Interest Rates are Changed In-Line with Market Expectations
Economic analysts are forecasting that Britain will keep its Official Bank Rate unchanged at 0.50%. The Euro-Zone, however, is expected to cut its Minimum Bid Rate by 25 basis points from 1.25% to 1.00%.
If interest rates are indeed held steady by the GBP, the Pound may experience some moderate strengthening in comparison to its primary currency rivals, that is, unless Britain introduces quantitative easing measures alongside this decision. In the other parts of Europe, if the ECB does reduce its interest rates, traders may expect a moderate depreciation in the value of the EUR. A cut to interest rates devalues a currency as it increases the amount of that currency available in the market. Analysts are also expecting the ECB to announce a quantitative easing program similar to that undertaken in the United States recently, which will likely drive the value of the EUR much lower, and also push more strength into the GBP.
In this situation, traders may see the GBP gaining strength to test the 1.5000 price level against the USD, while the EUR/USD may lose some ground and trade near the 1.2900 price level.
If Central Banks will Surprise the Market
As of now, analysts are predicting a rate cut throughout the Euro-Zone, not including Britain. If, however, these rate cuts are not as deep, or if they are not taken at all, the likely result will be a continuation of the current trends for the EUR. This may indicate that the central bank is more confident in the future growth of its economy and believes that a rate cut will undermine this recently gained strength. Likewise, if the BoE refuses to keep rates steady and instead decides to increase rates, as some have suggested, the result will be a much stronger appreciation in the GBP and renewed confidence in the British economy.
With these results, the GBP will continue on its strong upward path and likely test the 1.5200, or even 1.5300, price level versus the USD. Likewise, the EUR will continue appreciating against the Dollar with the price level of 1.3500 potentially being reached by beginning of the following week.
What is the Non-Farm Employment Change Report?
The U.S. Non-Farm Employment Change report, also known as “Non-Farm Payrolls” (NFP) and the “Employment Report,” is a monthly economic indicator used to measure the change in the number of employed people, excluding the farming industry.
Each month, the Current Employment Statistics Program surveys about 150,000 businesses, representing approximately 390,000 worksites, in order to provide detailed industry data on employment, work-hours, and earnings of workers on non-farm payrolls for all 50 U.S. states. The survey is then published on the first Friday of each month.
Traders value the indicator with the highest importance as its early monthly release can set the tone for the rest of the month’s market movement. Investors should also note Wednesday’s 12:15 (GMT) release of Automatic Data Processing Inc.’s (ADP’s) estimate of Non-Farm Employment Change. In the past, ADP has provided an accurate assessment of what was to come from the actual NFP release two days later. With the volatility of world economies in recent months, however, ADP has not been able to correctly estimate the Non-Farm Payroll outcome, only strengthening the real power behind Friday’s news release.
How this Report can Hurt the USD
Expectations for this month reveal that the Non-Farm Employment Change figures are forecasted to be slightly better than last month’s, with a release of -615K, up from -663K. A release such as this highlights the renewed strength in the U.S. economy and could potentially drive investors into riskier investments, and likewise out of the currency market, away from the USD.
The recent economic struggle, which is being fought vehemently by the U.S. government, has created uncertainty in the market for the USD, which is driving its value to unpredictable highs and lows. This Non-Farm Employment Change report has delivered negative figures for several consecutive months now; yet still the USD is gaining strength. If this report comes inline with market forecasts, or better, this would mean the USD could be facing renewed weakness as investors flee the safe-havens in exchange for riskier assets, causing the EUR/USD pair to climb back toward levels around 1.3600 in the short run, or higher.
How this Report can Help the USD
On the other hand, the U.S. Non-Farm Employment Change report may indeed print a much lower-than-expected figure, signaling a battered and bruised U.S. economy that is still a long ways off from exiting this recession.
If the actual figure will surprise the market and be lower than forecasted, traders are likely to see a bullish run in the USD. In the situation where the survey delivers worse figures than expected, such as -700K instead of the forecasted -615K, investors might be compelled to reevaluate their strategies and go long on the USD as they flee riskier assets in exchange for safe-havens. In this turn of events, the USD will likely halt any recent bearish movement, and the EUR/USD could drop toward levels of 1.2900 immediately following this release, or possibly lower if the European interest rate decision on Thursday already lowered this pair to that price level.
