By DailyFX – There have already been three interest rate decisions so far this week.The Reserve Bank of Australia didnt surprise anybody last night when… … Governor Glenn Stevens announced the policy group was keeping the nations overnight cash rate unchanged at 6.25 percent.

A little later in the day, the European Central Banks meeting concluded in the
same lack of surprise for the markets, though the decision itself made a
few more waves as the benchmark rate for the region was lifted 25 basis
points to 4.00 percent. Finally, the Reserve Bank of New Zealand took
that last step by overriding the consensus among economists and hiking
its own OCR to a nine-year high 8.00 percent. With all this activity
perking speculation and testing historically low levels of volatility,
traders now turn a more watchful eye on the Bank of Englands own rate
decision. Both the market and economists are expecting policy officials
to leave rates untouched at 5.50 percent. This outlook is backed by a
number of data highlights that suggest the Monetary Policy Committee
will hold its hand in order to gauge whether past efforts to cool growth
and inflation are taking effect. For growth, economic expansion cooled
only slightly in the first quarter from a 3.0 percent pace to 2.9
percent, though this was enough to record the first deceleration in
seven quarters. Perhaps more pressing though was the pull back in
analysts preferred inflation gauges. The annual consumer price index
for April fell back from its decade high 3.1 percent gait in April as
the retail price index stepped back from its equally hot 4.8 percent
pace. On the other hand, these levels are still well above the BoEs
tolerance band. Whats more, this is the first meeting since a 9-0 vote
for a hike in May which followed a letter from Governor King to
Chancellor Brown to address what is being done to rein in rampant price
growth. So will this meeting turn out to be more like the RBAs or
RBNzs rate decision? Only time will tell; but speculation will
happily fill the void until then.

Bonds – 10-Year Long Gilt

Yields on the benchmark ten-year gilt have steadily risen since the
middle of March when data really started to fuel expectations of another
round of monetary policy intervention. When yields first began to turn,
data was fueling a steep rise as speculators attempted to divine the
possibility that the notoriously unpredictable BoE would steer interest
rates towards. Ironically, when a rate hike seemed almost certain, the
rally cooled somewhat. Gilt traders were given the closest thing to a
promise that a rate hike was in store when BoE Governor Brown wrote the
first letter to the Chancellor of the Exchequer describing what would be
done to bring inflation in line. Following trend, now that things are
uncertain and rates expected to be held steady, yields are back on the
rise.

FX – GBP/JPY

GBPJPY has done nothing but drive itself into an even tighter wedge
formation as markets await the next big shift in rate differentials.
Will the carry trade prevail or will traders liquidate their leveraged
positions en masse? With central bank action on the docket this week,
GBPJPY could maintain its lofty levels as price has steadied above
support at 241.00. The Bank of England is widely expected to leave rates
steady at 5.50 percent on Thursday morning, however, the British
monetary policy makers have been known to surprisingly hike in the past,
citing upside inflation risks. Following the Reserve Bank of New
Zealands unexpected rate hike Wednesday evening, traders may be
feeling especially edgy ahead of the UK central banks announcement. If
the BOE defies analyst estimates, the British pound will surge, sending
GBPJPY hurdling towards resistance at 243.00. However, should we see
steady UK rates, GBPJPY may go little changed or soften slightly, as no
statement will be released and markets will have to await the release of
the meeting minutes on June 20th. Furthermore, if we see a combination
of unchanged rates in the UK along with a sustained bout of Japanese yen
strength, GBPJPY could break support, resulting in precipitous declines
towards 239.00.

Equities – FTSE 100 Index

The UK's FTSE 100 Index followed other global equity indices, falling
1.7 percent – the most in more than two months – to 6,522.7 as all but
two stocks in the benchmark retreated. The sole survivors included
Rolls-Royce Group Plc and Royal Bank of Scotland Group Plc, while Marks
& Spencer Plc led retailers lower and Rio Tinto Group paced a decline by
mining companies. Marks & Spencer, the biggest UK clothing retailer,
plunged 2.7 percent to 674 pence while Next Plc, the UK's third- largest
clothing retailer, lost 3.2 percent to 2123 pence. A retreat in metals
sent Rio Tinto, the world's third-largest mining company, down 3.4
percent to 3550 pence, as Anglo American slipped 4.1 percent to 2940
pence.

The FTSE 100 could be in for hard times on Thursday, as a rate decision
by the Bank of England looms on the horizon. While the Bank is widely
expected to leave rates steady at 5.50 percent, the British monetary
policy makers have been known to surprisingly hike in the past, citing
upside inflation risks. Such a result this time around could send the
FTSE 100 spiraling lower towards 6,400 as interest rates become more
restrictive for the economy as a whole. Furthermore, with the index
already below a major supporting trendline, it will be even more
vulnerable to declines. On the other hand, a decision to leave the
overnight lending rate unchanged could leave UK equity traders breathing
a sigh of relief and going back to their bullish stance.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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