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Currency Matters

Most of the focus last week focused on Spain as the Spanish government committed itself to meeting tough deficit targets laid out in its 2013 Budget. Additionally, the results of an independent bank stress test were released last week showing that Spain will require a further EUR 59.3 billion to stave off a serious economic downturn. The path has now well and truly been paved for Spain to seek financial assistance from the EFSF/ESM (a bailout), which is something we will likely see before the end of the month.

This week the BoE and ECB will be holding monetary decision meetings and whilst there is the possibility of interest rates being adjusted, it is expected that they will remain unchanged in October. Other key pieces of economic data being released this week include a number of PMI results from the Euro zone and the US, as well as US unemployment and payroll figures.

Please find a summary of this week’s economic calendar below:

01.10.12
08:58 EU Markit Manufacturing PMI
09:28 UK Markit Manufacturing PMI
09:30 UK Mortgage Approvals
09:30 UK Consumer Credit
10:00 EU Unemployment Rate
13:58 US Markit Manufacturing PMI
15:00 US Construction Spending
15:00 US ISM Manufacturing PMI

02.10.12
05:30 RBA Interest Rate Decision
09:30 UK PMI Construction

03.10.12
09:00 EU Markit Services PMI
09:28 UK Markit Services PMI
10:00 EU Retail Sales
13:15 US ADP Employment Change
15:00 ISM Non-manufacturing PMI

04.10.12
12:00 BoE Interest Rate Decision
12:00 BoE Asset Purchase Facility
12:45 ECB Interest Rate Decision
13:30 ECB President Draghi’s speech
13:30 US Initial Jobless Claims
19:00 US FOMC Minutes

05.10.12
11:00 German Factory Orders
13:30 US Nonfarm Payrolls
13:30 US Unemployment Rate

01.10.12 Mark Webster

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European Central Bank Preview

The European Central Bank (ECB) will meet today and at 12:45 they will announce the latest European Monetary Union (EMU) interest rate decision. As a result of the rapidly deteriorating economic data from the Euro zone it is largely expected that the ECB will cut interest rates by 0.50%.

This has had the effect of the Euro coming under downward pressure. This is a reflection of the sharp deterioration of economic conditions in the EMU. In particular we have seen unemployment rise sharply in the EMU. In Spain the unemployment rate is above 14% and in Ireland the rate has also climbed sharply to 11%. The average rate of unemployment in the Euro zone is now 8.5%. Even conditions in Europe’s largest economy, Germany, are becoming particularly ugly as they struggle with a sharp decline in exports, not helped by the strength of the Euro!

It has long been argued by Currency Matters that the ECB is behind the curve especially when compared to the aggressive actions of the Bank of England and the Federal Reserve. As such, it will be particularly interesting to see if ECB President Trichet makes any comments in the following press conference at 13:30 pointing towards further cuts or the possible implementation of non-traditional monetary policy.

The ECB have been particularly cautious in their approach to monetary policy during the current downturn. However, I believe that the pressure on the ECB to act more aggressively is building.

I believe it is becoming increasingly apparent that the economic situation in the Euro zone, is not vastly better than the conditions we are seeing in the UK. As such, I am expecting the Euro to weaken over the coming weeks. The case for this will also be enhanced, as the interest rate differential advantage that the Euro currently holds decreases.