Central Bank Decision May Weigh on Forex Markets – Paxforex

Tomorrow forex traders will get two important central bank decisions; one from the Bank of England which is likely to have an impact on the British Pound and one from the European Central Bank which should move the Euro. The Bank of England and European Central Banks are battling two different scenarios which means that their future policy movies are very likely to diverge.

The Bank of England is facing a stronger UK economy with relative high inflation and an unemployment rate which is contracting. Price pressures are increasing and the Bank of England is likely to reign in their economic stimulus while and interest rate increase is also very likely over the next six to twelve months. This has put upward pressure on the British Pound which approached the 1.7000 level yesterday before retreating.

The European Central Bank is faced with a very stagnant recovery, high unemployment and a deflationary environment. Interest rates leave little room for maneuvering, but forex traders should be prepared for an interest rate cut down to 0.15% or potentially 0.10%. One move which some have been expecting is a negative depository rate which currently stands at 0.00%.

The Euro has continuously expanded it rally especially against the US Dollar which pushed the EURUSD close to 1.4000 during yesterday’s trading session. Forex traders will look for potential changes in the language of the Bank of England as their initial threshold for potential action, an unemployment rate below 7.0%, has been breached. Should the Bank of England hint at a reduction in stimulus the British Pound is likely to surge past the 1.7000 mark.

The European Central Bank is known to surprise the markets and tomorrow could result in a surprise move despite the fact the President Draghi and other voting members have stated that current policy is sufficient and that deflationary pressures are due to a contraction in energy prices. An economic stimulus package is very unlikely for now, but a surprise interest rate cut or suspension of bond neutralization could play out tomorrow which should cause a severe correction in the Euro short-term.

Written by Paxforex