FX Trading Fundamentals: ECB Cuts Interest and Deposit Rates – June 5, 2014

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FX Trading Fundamentals: ECB Cuts Interest and Deposit Rates - June 5, 2014

The US dollar advanced against its major FX trading counterparts again when risk aversion popped back in the financial markets. Data from the US economy was mostly stronger than expected, with the ISM non-manufacturing PMI climbing from 55.2 to 56.3. Revised non-farm productivity and unit labor costs also showed better than expected results. However, the ADP non-farm employment change missed expectations, leading some to expect a weak NFP reading for Friday. For today, only the initial jobless claims report is due and it might show a higher figure of 309K versus the previous 300K.

The euro sank again in recent FX trading when traders started pricing in expectations of further easing from the ECB in today’s interest rate decision. Euro zone data was mostly in line with expectations, with only the Spanish services PMI printing weaker than expected results. The ECB caused a massive euro selloff as they announced an interest rate cut from 0.25% to 0.15% and negative deposit rates.

The pound struggled to hold steady in recent FX trading when services PMI came in better than expected at 58.6 versus the estimated 58.3 reading. However, this is a small decline compared to the previous 58.7 figure. For today, the BOE interest rate decision might spark a lot of volatility for pound pairs, although Carney and his men are likely to keep monetary policy unchanged for the time being.

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FX Trading Analysis

The franc bounced back and forth in recent FX trading, as the lack of top-tier data from Switzerland kept the currency in range. There are still no reports due from Switzerland today but bear in mind that the franc tends to react the same way as the euro when there are top-tier events in the euro zone. With that, the ECB rate statement might also lead to franc weakness if the central bank decides to ease.

The yen put up a good fight to its major FX trading counterparts, despite the lack of data from Japan yesterday. There are no major reports lined up from the country today, which suggests that yen pairs might be sensitive to risk sentiment and country-specific events.

The Australian dollar edged higher in recent trading when the GDP release showed a stronger than expected 1.1% growth versus the estimated 0.9% uptick. The New Zealand dollar also recovered off its recent lows but maintained its downtrend. As for the Canadian dollar, it lost ground on the heels of a dovish BOC statement, as Governor Carney spoke of weak inflationary pressures. Australian trade balance and Ivey PMI are the main event risks for the Aussie and Loonie today.

To contact the reporter of the story: James Brennan at james@forexminute.com

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Samuel Rae is an active retail trader across a variety of assets, including currencies, stocks and commodities and the author of Diary of a Currency Trader (Harriman House). His personal strategy focuses primarily on classical technical charting patterns with a fundamentally supportive bias, combined with a strict, risk management-driven approach to entries and exits. He is an Economics graduate from Manchester University, UK.