I Got the Power

The European Central Bank has got the power. It has got the power to supervise. EU finance ministers, in the early hours of this morning, agreed to appoint the ECB as Europe’s single, all-encompassing, banking supervisor. The new supervisory body is scheduled to become fully operational by early 2014 and will be responsible for the oversight of approximately two hundred of the biggest banks in Europe, as well as smaller institutions where necessary.

The rhetoric coming out of Europe following this agreement has been pretty positive, as German Chancellor Angela Merkel commented: “The importance of the deal cannot be assessed too highly”. Considering the relatively turbulent year the Euro zone has experienced, and the criticism European leaders have received over their perceived lack of action and inability to compromise, today’s agreement is quite a scalp for EU leaders and it is hoped this could be a pivotal turning point in dealing with the region’s economic woes.

However, we have seen seemingly positive decisions reached before, only for deals to fall through due to an inability of EU leaders to deliver. Cleary now, cementing the legal framework for this body and ensuring its implementation, after what could be described as a slightly rushed agreement, is vital. Following this agreement, the path has now been paved for Eurozone finance ministers to be provided with the option of using the European Stability Mechanism (Eurozone bailout fund) to recapitalise banks directly, rather than through individual countries lending institutions as is currently the case, provided a unanimous request is made to the ECB to assume direct oversight of the institution.

Across the pond yesterday, as we expected, the Fed decided to keep US interest rates at 0.25%, however what was not expected was the Feds decision to confirm that any future rate movement would now be linked to economic indicators. Current interest rates are now set to remain as they are until unemployment falls to 6.5%, provided that inflation is not projected to rise above 2.5%.

Markets are relatively flat this morning, with only a small amount of movement in the Euro following the key deal reached regarding the ECB’s new supervisory role. GBP/EUR continues to trade sideways as it has been doing for last 3 months or so now. Sterling is currently at 1.2341 against the Euro, with hour charts suggesting that we could see a potential rise back to a key level of resistance at 1.2375 today. However, as markets continue to digest the news regarding the ECB, should sentiment towards Europe turn positive and the Euro strengthen, we could see GBP/EUR drop back to 1.2273.

With little economic data out this morning, the key focus for market participants today will come this afternoon as key economic data is released in the US. US Retail Sales and Producer Price Index figures will be released at 13:30 GMT and could be a catalyst for some movement in the Greenback, however any major movement over the next few weeks is very likely to be linked to news regarding the progress of fiscal cliff talks. After pushing up to a high of 1.6171 yesterday, GBP/USD has fallen back to, and is currently trading at, the key level of resistance that we discussed yesterday of 1.6124. Another break above this level today would be significantly bullish for GBP/USD.

Mark Webster