Aussie Rate Hikes Signalling Continued Up Trend; More News to Come!

As predicted, the Board decided to increase the cash rate by 25 basis points to 7.0 per cent yesterday, the highest since 1996, and was spot on with analysts’ forecasts. What was more interesting was what was said afterwards by the Reserve Bank of Australia as new information points to significant inflation pressures. CPI inflation on a year-ended basis picked up to 3 per cent in the December quarter, with underlying measures around 3½ per cent. Indicators of demand remained strong through the second half of 2007, and reports of high capacity usage and shortages of suitable labour persist. In the short term, inflation is likely to remain relatively high and will probably rise further in year-ended terms, though the Bank expects it to moderate somewhat next year. Thus for now, the Aussie remains one of the hottest commodity currency due to current and future anticipated interest rate spreads.

Not much is going on with regards to the trading front as the majority of currencies are sideways trending simply due to the upcoming interest rate decisions from the BOE and ECB. Furthermore, investors also seem hesitant to take bets on major currencies with most Asian financial markets, including Hong Kong, closed on Thursday and Friday for the upcoming Lunar Chinese New Year celebrations.

The BOE is expected to lower its rate further while the ECB rate will likely stay unchanged at 4 percent and all eyes and ears will be glued to the ECB’s subsequent statements regarding any future policy changes and its intended directions as some are betting that the rates will go down by the end of this year, while others expect the ECB to keep the rate on hold for 2008 and start increasing in early 2009. While there is pressure on the ECB to follow its US and UK peers in easing monetary policy, the high inflation in the Euro Zone is preventing it from doing so.

Proceed with caution as the market is trading within a narrow range awaiting for a clear direction as there is also tons of vital U.S. economic data coming in on the horizon on Tuesday and Thursday.

……

Regarding the on-going long-term trade on the Daily chart for EUR/GBP, I’ve decided to close one portion of my lot for a gain of +45 pips simply due to the uncertainty in the market regarding the ECB’s future direction and subsequent profit taking the past two days. The other position is running risk-free with position already set to stop loss and barring any good news, I will look to re-enter again possibly in the 0.7550 area and shooting for the stars with the previous swing high and the full extension of the previous swing to the upside. But for now, I have decided to bank some profit for the month and considering the EUR/GBP’s pip value is twice that of a USD-based currency, it isn’t too shabby at all.