As expected the Bank of England has maintained interest rates at their record low of 0.50% and has voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves known as Quantitative Easing by £50billion to a total of £325 billion.
The Bank of England’s latest inflation and output projections will be published in the Inflation Report to be published at 10:30 on Wednesday 15th February and the minutes of today’s meeting will be published at 09:30am on Wednesday 22nd February.
The Pound currently trades at 1.19 against the Euro and at 1.58 against the US Dollar.
The Pound has recovered back above 1.20 against the Euro and continues to trade around 1.55 against the US Dollar on the interbank market.
Despite UK Gross Domestic Product (GDP) data showing that the UK economy contracted by 0.2% in the final quarter of 2011, the initial market reaction suggests that many expected the data could have been worse.
The recent UK economic data, coupled with the European debt crisis and anaemic global growth points to the UK struggling to avoid entering into another technical recession i.e. two consecutive quarters of negative GDP growth.
Whilst many analysts are hopeful of a mild or shallow recession in the UK, the fragile outlook increases the likelihood of a further expansion of the Bank of England’s Quantitative Easing Asset Purchase Programme (QE). Moreover, minutes released today from the Bank of England’s last Monetary Policy Committee (MPC) meeting held on January 12th indicated that a number of MPC members believed it was a likely a further expansion of asset purchases (QE) would be required, possibly as soon as the next MPC meeting due on the 9th February.
Aggressive QE from the Bank of England would pose a threat to the Pounds value and is one of the factors preventing the Pound forging higher against the troubled Euro. The Pound may be able to hold against a troubled Euro but could struggle against the US Dollar.
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The Euro has continued to depreciate as markets become increasingly unconvinced with the outcome of last week’s EU summit. European bond auctions will be monitored as Germany and Italy auction €5b of 2 year bonds and €5b respectively.
Pressure was also increased on the Euro following last night’s Federal Reserve decision to hold interest rates and withhold additional stimulus at this time. The resulting falls in equity markets increasing safe heaven flows.
The Euro has fallen to its lowest level against the US Dollar since January, currently trading at 1.3040 on the interbank market. The Pound is pushing towards 1.19 against the Euro, currently at 1.1890, the highest level since February. The Pound is currently trading between 1.54 and 1.55 against the US Dollar.
The following rates are based on the current interbank market and are shown for indicative purposes only. Please do not hesitate to contact the dealing team on 01695 581 669 or firstname.lastname@example.org for a live quote.
12:00: Bank of England interest rate and Asset Purchase Programme (QE) announcement.
12:45: European Central Bank interest rate announcement.
13:30: European Central Bank press conference.
23:50: Japanese GDP.
All day: EU economic summit.
02:00: Chinese Consumer Price Index.
07:00: German Trade Balance.
09:30: UK Producer Price Index.
09:30: UK Trade Balance.
A full economic calendar can be found at http://www.currencymatters.co.uk/market-data/economic-calendar/ . Please do not hesitate to contact the dealing team for further information or for a live quote.
Euro Talks Calendar
Monday: Nicolas Sarkozy and Angela Merkel meet to try and agree a plan for tighter eurozone controls
Italian PM Mario Monti seeks parliamentary approval for his austerity package
Ireland’s government begins to unveil details of its proposed austerity budget
Tuesday: US Treasury Secretary Timothy Geithner arrives in Germany before travelling to France and Italy for talks with euro leaders
Wednesday: The talking continues as many EU leaders gather in Marseille for a European People’s Party congress
Thursday: ECB’s monthly policy meeting could produce new measures
Thursday and Friday: Crucial EU summit in Brussels to consider Sarkozy-Merkel plan
Today the Pound has traded between 1.1623 and 1.1669 against the Euro and between 1.5589 and 1.5667 against the US Dollar. The Euro currently trades at 1.3450 against the US Dollar.
The following exchange rates are shown for indicative purposes only. Please note the rate you are able to achieve will depend on the amount of currency being purchased. Please do not hesitate to contact the dealing team on +44 (0) 1695 581 669 for a live quote.
Today’s Bank of England Quarterly Inflation Report has suggested that UK inflation has peaked and is likely to fall sharply from its current rate of 5% (down from 5.25% in the previous month September) to 1.3% over two years. The Bank has also cut its UK economic growth forecasts to 1% for 2011 & 2012 but indicated growth should climb towards 3.1% in two years.
Both the outlook to economic growth and inflation are seen as unusually uncertain and much will depend on developments in the Eurozone, the Eurozone debt crisis posing the single biggest risk to the UK economy.
Current forecasts suggest that UK interest rates are likely to remain low for a prolonged period of time with the first interest rate hike from the Bank of England not expected until at least 2013 whilst the prospect of further Quantitative Easing remains a strong possibility.
The debt crisis continues in Europe with Italian 10 year debt trading back above the unsustainable level of 7% and the yield of Spanish government bonds back above 6%. Besides the usual suspects, debt market yields of France, Austria, Netherlands and Belgium have also risen sharply, hitting Euro era highs. Moreover, the spread between French and German 10 year debt has also hit a fresh high.
Clearly the debt crisis poses a significant threat to the value of the Euro, the Euro has been surprisingly resilient so far but over the medium term I would expect the Euro to fall against the US Dollar and Sterling.
On the interbank market the Pound is currently trading between 1.57-1.58 against the US Dollar and between 1.16-1.17 against the Euro.
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The European Central Bank has cut interest rates by 0.25% to 1.25%. The Markets will now await the ECB press conference at 13:30, possible Greek PM resignation and the on-going G20 summit.
Financial markets have responded negatively to the unfolding drama surrounding the Greek bailout, with equities and the Euro starting November under strong selling pressure.
EURGBP fell from last week’s high of 0.8830(GBPEUR 1.1325) to a low of 0.8548 (1.16986) yesterday and is currently trading around 0.8611 (1.1613).
Against the US Dollar the Euro fell from last week’s high of EURUSD 1.4247 to 1.3608 yesterday, again the Euro has pared some of its losses and EURUSD currently trades at 1.3783.
The Greek cabinet has endorsed Greek Prime Minister Papandreau’s controversial plan to hold a referendum on the EU debt rescue package and the market will now await the outcome of today’s talks between Papandreau and his French and German counterparts President Sarkozy and Chancellor Merkel ahead of Thursday and Friday’s G20 summit and Thursday’s European Central Bank interest rate decision.
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The Euro has appreciated following the EU summit deal on the Eurozone debt crisis. The agreement came after prolonged late night talks and for the time being has convinced the financial markets they have a response to the economic crisis. The deal will focus on 3 key points:
Firstly, private banks will be asked to accept a 50% loss on Greek government debt. This is expected to cut the nation’s debt load to 120% of GDP in 2020. Under current conditions, it would have grown to 180%.
Secondly, the European Financial Stability Facility (EFSF) will be leveraged four-five times and increased from €440 billion to €1 trillion.
Finally, the deal will aim to recapitalise European banks, which will be required to increase their core cash reserves to 9% by June 2012.
The Euro has appreciated back above 1.40 against the US Dollar and above 0.8760 (GBPEUR 1.1416) against the Pound. The market is likely to remain volatile and will continue to await and scrutinise the finer technical and legal detail and implementation of the agreement.
The Pound continues to trade either side of 1.14 against the Euro and around 1.57 against the US Dollar following the release of this morning’s Bank of England minutes.
The minutes showed that the Monetary Policy Committee (MPC) voted unanimously in favour of increasing its current Quantitative Easing Asset Purchase Programme by a further £75bn to £275bn.
The minutes revealed that the MPC considered extending Quantitative Easing between £50bn-£100bn.
The Bank of England’s next monetary policy decision is due on the 10th November. Despite the latest inflation data hitting 5.2%, 3.2% over the Bank’s 2% target. The Bank remains committed to its view that inflation should have peaked and will begin to fall back rapidly in 2012.