Stock markets across Europe and America have fallen as shares in one of Portugal’s largest banks were suspended after falling more than 17% after reports that their parent company missed some short term debt repayments, a reminder that the European banking crisis may not be over.
With US interest rates set to stay near zero this year and the market looking for safe havens the Japanese Yen appreciated sharply, forcing USD/JPY from a high of 101.66 to 101.07 before recovering slightly to 101.18, still down 0.42%. The Euro has fallen but has remained surprisingly resilient, falling against the USD from 1.3649 and currently trading at 1.3597 but could be susceptible to further falls should confidence in the Portuguese banking system and the wider Eurozone continue to deteriorate.
In the UK, the Pound is relatively steady after the Bank of England voted to maintain the Bank Rate at 0.50% and maintain its asset purchases at £375bn. GBP/USD has traded between 1.7106 and 1.7122. GBP/EUR has appreciated from 1.2551 this morning currently at a high of 1.2595.
In an effort to encourage lending, stimulate the Eurozone economy and avoid deflation the European Central Bank (ECB) today cut its main benchmark rate from 0.25% to 0.15%. More significantly the ECB cut its deposit rate from 0.00% to minus 0.10% meaning that commericial banks will have to pay the ECB to lodge their money with the central bank in a bid to incentivise banks to lend to businesses rather than hoard cash at the ECB, therefore stimulating economic growth. The ECB also exteneded its programme of long term loans offerd to banks who lend to businesses. ECB President Mario Draghi indicated that further measures could be introduced in the future.
Following the ECB announcement and the following press conference the Euro fell from a high of 1.3643 to a low of 1.3504 before recovering to just below 1.36 by 14:00 GMT. Against the Pound the Euro fell from 0.8139 (1.2286) to a low of 0.8065 (1.2399) before appreciating back towards 0.81p by 14:00 GMT.
Elsewehere, as expected the Bank of England maintained its Bank Rate at 0.50% and the size of its Assett Purchase Programme at £375bn. We now await the minutes of that meeting due to be released 08:30 GMT on Wednesday 18th June to gain an insight into if the Bank of England is any nearer to raising UK internest rates. The Pound continues to trade between 1.67 and 1.68 against the US Dollar.
The Euro continues to remain under pressure following concerns that the Eurozone risks a period of deflation and prolonged low interest rates. The official Eurozone inflation rate released on Tuesday confirmed that Eurozone inflation fell from 0.90% in November to 0.80% in December.
As expected, the ECB held interest rates at their record low of 0.25%. In the post meeting press conference, ECB President Mario Draghi commented that he expected key ECB interest rates will remain at present or lower levels for an extended period of time. Draghi also warned that the Eurozone may experience a prolonged period of low inflation and that risks on economic outlook remain on the downside.
As a result the Euro depreciated against the US Dollar hitting a low of 1.3548 and depreciated against the British Pound hitting a low of 0.8231 (GBPEUR 1.2149).
In the UK, the Bank of England kept its interest rate at 0.50% where they have been held since March 2009 and maintained its Quantitative Easing Asset Purchased Programme at £375bn. The Bank only released a brief statement and issued no further guidance. Back in August, Governor Mark Carney said unemployment would have to decline to 7% before an interest rate rise would be considered. An improved economy has meant that this could happen sooner than expected. The majority of economists still do not expect UK rate rises before mid-2015, however, expectations are mounting that the Bank of England could start to raise interest rates in 2014.
The Pound continues to trade near recent highs (1.6604 02/01/14) against the US Dollar at 1.6441-1.6498 and has so far hit a high of 1.2149 against the Euro.
The Pound has surged a cent higher against the Euro today following today’s decisions from the Bank of England and the European Central Bank. The Bank of England Monetary Policy Committee voted to maintain interest rates at 0.50% and its Quantitative Easing Asset Purchase Programme at £375bn whereas the European Central Bank voted to cut their interest rate by 0.25% from 0.50% to 0.25% resulting in a Sterling interest rate differential advantage of 0.25%.
GBPEUR hit a high of 1.2045 from an earlier low of 1.1890 before falling back to 1.1980. The Euro also fell against the US Dollar with EURUSD falling from a high of 1.3528 to a low of 1.3296 before recovering back above 1.33 and currently trading at 1.3365. The Pound is down against the USD from a high of 1.6089, hitting a low of 1.6010 before recovering slightly and currently trading at 1.6025.
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Congress finally managed to reach an agreement yesterday evening regarding an increase to the federal debt limit and a short term budget which will reopen the government and send furloughed workers back to work. Despite Congress having left passing a bill to the very last minute, as has become a common occurrence in recent years, judging by market reaction, investors did not seem too phased despite a plunge back into global economic crisis being potentially imminent.
Following the aversion of what could have been the beginning of a truly global crisis – the first US default in over 200 years – very little changed in the markets. Equity markets remained rather quiet as did the FX market, especially when taking into consideration the enormity of the catastrophe that could have materialised had an agreement not been reached. The dollar rose slightly in the build-up to Congress reaching a deal with GBP/USD falling to a daily low of 1.5893 just after 17:00 yesterday, however the greenback has pared its gains this morning with cable rising to a daily high of 1.6092 and similarly EUR/USD reaching 1.3637 so far this morning after having fallen as low as 1.3472 yesterday.
Tomorrow evening we will see potentially the most crucial Federal Reserve Interest Rate Decision and FOMC statement of this year. Whilst the Federal Reserve is widely expected to maintain interest rates at their current levels, speculation has grown in recent months that they will make their first reduction to their unprecedented bond buying program this month. ‘Tapering’ has been the buzz word for the last month or two ever since Federal Reserve Chairman Ben Bernanke hinted this summer that the Fed would begin to taper its current $85 billion per month bond buying program before the end of the year.
As the state of the US economy has gradually improved over the course of this year and US unemployment figures have closed in on the Fed’s 7% target (disregarding this month’s miserable Nonfarm payrolls), expectations have grown that September will be the month that tapering will begin. The majority of market commentators had been expecting a gradual reduction to begin this month at around the $10-$15 billion mark, however with the very poor Nonfarm payrolls released earlier this month it remains plausible that the Fed will hold firm and maintain their current purchasing levels for yet another month.
Given the amount of speculation that has been afforded to this meeting we can expect to see a substantial amount of volatility surrounding the greenback in the run up to and following the release of the Federal Reserve’s decision. Should the Fed decide to maintain their current level of stimulus we could see cable advance further on its gains this week with a potential test of 1.60 upwards. A reduction of $10-$15 billion would likely hold GBP/USD steady with limited downside risk for sterling following the consistently positive data that has been released recently concerning the UK economy – enough to even suggest that we have “turned the corner” according to George Osborne. Whilst a reduction of $20 billion upwards would likely lead to significant Dollar strengthening right across the board and could see cable par its recent gains whilst 1.56 levels would likely hold off any reversal.
Tomorrow we will also see another interest rate decision however the outcome of which is considered a lot more certain and its impact far less wide-reaching. The Bank of England will release their interest rate decision and minute’s tomorrow morning at 09:30 UK time. BoE Interest rates and stimulus levels are expected to remain unchanged following the Bank of England governor Mark Carney’s comments to a Parliament Select Committee last week where he indicated that the BoE will maintain historically low interest rates for as long as necessary.
GBP/EUR is currently trading close to the 1.19 level, its highest level since the turn of 2013, with a consistent break above 1.1950 potentially signalling a return to levels above 1.20. However, until the outcome of the German Federal Elections later this month, which now seems a forgone conclusion in favour of Chancellor Angela Merkel, movement in GBP/EUR is likely to be limited. Once the German election has finally been decided we may well see a re-emergence of the Euro-Crisis that has notably been shunned from media attention in the run up to elections. A return to Euro-zone bailouts and a seemingly imminent collapse of the euro will only help push sterling back up to 2012 levels against the common currency.
The Bank of England Monetary Policy Committee (MPC) voted unanimously to keep rates on hold and against further Quantitative Easing in July. Some MPC members, however, said more stimulus was warranted but they wanted to look at alternative means of providing it. “An expansion of the asset purchase programme remained one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore sensible not to
initiate an expansion at this meeting,” the minutes said. New Governor Mark Carney therefore obviously voted to keep rates and QE on hold.
As a result the Pound spiked higher against the USD jumping from 1.5128 at 09:25 to 1.5245 just after 09:30. The pound also spiked higher against the Euro hitting a high of 1.1580.
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The Euro has fallen following hints from the European Central Bank (ECB) of a possible rate cut in the future. The ECB left interest rates unchanged at their historic low of 0.50% and commented that “the Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time.”
The Euro fell against the US Dollar from an earlier high of 1.3022, hitting a low of 1.2884 before recovering to 1.29.
The Pound has fallen sharply following today’s statement from the Bank of England. The Bank warned that “in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy”. The Bank’s statement immediately scaled back market expectations of a rate rise from the Bank and with UK interest rates expected to remain low for a prolonged period of time the Pound has fallen markedly. Against the Euro the Pound has fallen from an earlier high of 1.1751 to 1.1585 and against the US Dollar the Pound has fallen from 1.5288 to 1.5075.
Bank of England Statement
The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.
Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile. In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time. Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.
In the light of these considerations, the Committee voted to maintain the size of its programme of asset purchases financed by the issuance of central bank reserves at £375 billion. The Committee also voted to maintain Bank Rate at 0.5%.
The minutes of the meeting will be published at 9.30am on Wednesday 17 July.
The Dollar has continued to appreciate with the Dollar Index breaking last week’s high and reaching a high of 83.50 so far today. GBPUSD hit a new recent low of 1.5136 on the interbank market today and a test of the recent low of 1.5008 last seen on the 29th May is favoured, with a likely break leading to a test of support at 1.4830. EURUSD currently trades around 1.30 after briefly breaking below 1.30 earlier today hitting a low of 1.2991.
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