Today as expected, both the Bank of England and the European Central Bank kept their key interest rates on hold at 0.50% and 0.25% respectively. The Bank of England also kept its Quantitative Easing Asset Purchase Facility on hold at £375bn.
In the following ECB press conference, ECB President Mario Draghi surprised the markets with his upbeat comments regarding Eurozone inflation and growth. Inflation is expected to climb from February’s 0.8% to 1.0% by the end of the year, 1.3% in 2015 and 1.7% in Q4 of 2016. Growth forecast was revised up to 1.2% in 2014. For 2015, growth is projected to be 1.5% and 1.8% for 2016.
As a result the Euro has made notable gains against the US Dollar and the British Pound. EURUSD appreciated from a daily low of 1.3722, hitting a high of 1.3858, and currently trades at 1.3843 (0.81%). Whilst EURGBP appreciated from 0.8207 (1.2185), to 0.8287 (1.2067), and currently trades at 0.8274 (+0.76%).
Elsewhere, the Australian dollar appreciated sharply today on better than expected economic data. Australian retail sales rose by 1.2% month on month and the trade surplus widened to AUD 1.43bn.
As a result AUDUSD appreciated from 0.8973 to a high of 0.9091 and the Pound depreciated by 2 cents against the Australian Dollar from 1.8624 to a low of 1.8407.
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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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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.
As expected, Mario Draghi has just confirmed that ECB interest rates will be cut from 0.75% to 0.5%. As a result of poor economic growth, lingering recession, record high unemployment rates and recent poor inflation figures, the ECB has finally decided that an interest rate cut is necessary in order to help encourage growth in Europe. Whilst the rate cut had been expected by markets today, it remains surprising how long it has actually taken for such a decision to come about, especially given the horrendous condition of numerous economies throughout the Euro Zone.
Volatility increased significantly in the run up to the interest rate decision and remained high post data release. Immediately following the decision markets began to spike, most notably EUR/USD plummeted to 1.3115 and then rocketed back up to 1.3184 in the space of one minute. Similarly GBP/EUR dropped to 1.1789 before rallying back to 1.1813 in just minutes.
Soon after this ECB president Mario Draghi chaired a press conference regarding the ECB’s monetary policy, in which Mr Draghi gave further details as to why interest rates had been cut. It was also disclosed that the ECB would consider taking interest rates to below zero “with an open mind” which has unsurprisingly led to a further weakening of the euro right across the board. GBP/EUR is now trading at 1.1876, whilst EUR/USD has fallen to 1.3063.
Today is a day of inflation figures as UK, Euro Zone and US Consumer Price Index data is set to be released. So far today we have seen figures released confirming that UK inflation remains above the Bank of England’s target of 2%, with UK Consumer Price Index figures remaining unchanged at 2.8%. Euro Zone inflation has increased marginally to 1.5%, up from 1.4% in February. Following these releases, the Euro has strengthened across the board as the likelihood of an ECB rate cut has now decreased on the back of the higher Euro Zone inflation figures.
This morning’s inflation figures have had the greatest impact upon the markets thus far today, as despite German Economic Sentiment Survey data falling sharply to 36.3 this month, the Euro has still strengthened against both the Pound and the Dollar. EUR/USD has reached a high of 1.5312 so far this morning, whilst GBP/EUR fell to 1.1699 following the inflation figures release. Attention will now turn to the US this afternoon where inflation figures and housing data are set to be released. Market participants will be keen to see whether the recent poor data coming out of the US continues.
Please find a summary of this week’s economic calendar below:
ECB President Mario Draghi Speech
09:30 UK Consumer Price Index
10:00 Euro Zone Consumer Price Index
10:00 Euro Zone Economic Sentiment Survey
10:00 German Economic Sentiment Survey
13:30 US Consumer Price Index
13:30 US Housing Starts
09:30 UK BoE minutes
09:30 UK Claimant Count Change
09:30 UK Unemployment Rate
09:30 UK Average Earnings
15:00 Canadian BoC Interest Rate Decision
19:00 US Fed’s Beige Book
G20 Finance Minister and Central Bank Governors Meeting
09:30 UK Retail Sales
13:30 US Initial Jobless Claims
15:00 US Philadelphia Fed Manufacturing Survey
G20 Finance Minister and Central Bank Governors Meeting
07:00 German Producer Price Index
13:30 Canadian Consumer Price Index
17:00 US FOMC Member Stein Speech
Yesterday saw substantial volatility within the markets courtesy of mixed PMI figures released in Europe and a tacit message from Mario Draghi suggesting that the European recovery will take longer than expected. Whilst the BOE’s decision to maintain interest rates and quantitative easing levels at their current level had little impact upon the markets, German and Euro Zone PMI figures falling short of expectations and Mario Draghi’s negative assessment of Europe’s recovery caused a substantial move in the euro throughout the day whilst GBP/EUR eventually closed flat at 1.1777. The dollar experienced similar levels of volatility yesterday following higher than expected US Initial Jobless Claims as GBP/USD closed near a six week high of 1.5225 and EUR/USD also closed up at 1.2926.
Despite the relatively high levels of volatility that were witnessed on both sides of the pond yesterday, the largest market movements were attributed to economic news coming out of Asia. In the early hours of yesterday morning the Bank of Japan committed to a substantial bond buying program worth over half a trillion dollars per year – the size of which took markets by surprise. Unsurprisingly however this lead to the most considerable Yen sell off that we have seen for quite some time with the Yen closing down across the board. The Yen touched a near three and a half year low yesterday against the Dollar and has now pushed above this level with USD/JPY reaching 97.15 so far this morning, whilst GBP/JPY has hit 146.67.
This morning we have seen relatively minor movements in the markets following the release of Euro Zone Retail Sales and German Factory Orders, both of which came out above expectations. Market participants are likely regrouping following yesterday’s volatile trading environment and preparing themselves for the release of the US Nonfarm Payrolls later today. Following the weaker than expected US data yesterday, another subpar performance today for the US jobs market could cause the Greenback to drop off even further, with GBP/USD potentially reach 1.53+.
The Euro is slightly down this morning as remnants of the political scandal that emerged in Spain last month continue to linger. Allegations published in Spanish Newspaper El Pais last month, suggested that from 1997 onwards, Spanish Prime Minister Mariano Rajoy received regular payments of €25,000 that were hidden from tax authorities. Although these are, at present, only allegations, the mere suggestion of such conduct is enough to worry markets. Should these allegations be proved to be true then we could see sentiment towards Spanish assets turn considerably negative, which would inevitably hurt the Euro.
Additional uncertainty is also likely to grow within the Eurozone as we approach the Italian elections at the end of this month, especially should the gap close further between front runner Pier Luigi Bersani and Berlusconi’s PDL party. This uncertainty is likely to have contributed to the tapered advance of the Euro this week, as its unrelenting strengthening seems to have now been somewhat restricted. The Euro has dropped off against both Sterling and the Greenback this morning, with the Pound having risen by nearly half a cent so far today against the Euro, and the pair is currently trading at 1.1575. The Euro has similarly dropped off against the Dollar, falling to a daily low of 1.3513 this morning, before holding, and slightly recovering to its current level of 1.3530.
Markets are likely to be trading relatively flat this afternoon with little economic data due out and only UK House Price data having been released this morning, showing prices declined in January. However the main driver behind decreased volatility today is likely to be the fact that market participants are holding their current positions ahead of the ECB and BOE interest rate decisions due to be made tomorrow afternoon. Whilst both rates are expected to remain unchanged, should there be any adjustment, this could well provoke substantial movement in the Pound or the Euro.
In yesterday’s blog we recalled comments made by Luxembourg Prime Minister last month that the Euro was then already ‘dangerously high’. It would appear that such concerns are growing throughout the Euro Zone regarding the current strength of the Euro. French President Francois Hollande commented yesterday that “the Eurozone must, through its heads of state and government, decide on a medium-term exchange rate”. It is likely that Mario Draghi will face questions regarding this issue at the ECB press conference tomorrow and any suggestion of controls being placed on the Euro could weaken the currency considerably.
It would appear that the world is on the brink of war. Currency war that is. According to the Russian central bank we are anyway. The comments come following Japans recent commitment to devalue its currency by increasing monetary easing within the country, in an effort to increase the country’s global competitiveness. Whilst at first sight the comments from Russia may seem alarmist, they raise a good point. If Japan is going to commit themselves to a policy of currency devaluation, it would appear inevitable that other countries will follow suit.
This follows comments made yesterday by Luxembourg Prime Minister Jean-Claude Juncker, who described the Euro as “Dangerously High”. This sparked a Euro sell off which led to EUR/USD dropping off to 1.3261 this morning after reaching a high of 1.3403 on Monday, its highest point since February 2012. Similarly the Euro weakened against Sterling as GBP/EUR reached 1.2097 this morning. This followed the pairs fall to 1.2011 yesterday, which was its lowest point in nine months, as the Euro had continued to strengthen on the back of ECB President Mario Draghi’s press conference last Thursday.
Cable finally broke below 1.6030 this morning after having been held at that level for the previous two days. The pair went on to hit 1.6003, testing a key Fibonacci level at 1.6010, before rebounding back to 1.6030+. The pair is again currently trading on the six month upward trend line after having briefly broken through this late last week. Continued downward pressure on Sterling following the World Bank growth rate downgrade and David Cameron’s persistent attempt to renegotiate Britain’s EU membership could see Cable fall back to 1.5911.
EU economic data released this morning showed Consumer Price Index figures for the region remained constant at 2.2% for December, as had been expected. We may well see further movement in the Dollar this afternoon as CPI figures are released at 13:30 in the US, along with US Industrial Production at 14:15 and the Fed’s Beige book at 14:15.
Markets are relatively flat this morning as participants wait and see what will be the outcome of two major pieces of economic data due out this afternoon. First we will see the Bank of England release its decision at 12:00 GMT on whether or not to alter interest rates or their asset purchase program. Whilst both of these are expected to remain as they are, market participants look keen to wait until these decisions are confirmed before taking a position within the markets.
A little later this afternoon we will see an ECB Monetary Policy Statement and press conference at 13:30 GMT. As in the UK, the ECB are expected to keep interest rates on hold at their record low of 0.75%. Whilst the Eurozone appears to have been stabilizing recently, there has however been no spectacular data release to suggest that a rate change at present would be warranted.
Elsewhere today we have seen commodity currencies react favourably to the positive data released in China this morning. Figures show that the Chinese Trade Balance rose substantially in December, reaching 31.6B for the month, well above market expectations of 19.7B. The Australian Dollar rose to its highest point against the Japanese Yen in four years following the data release, and is currently trading at AUD/JPY 93.23. The Aussie Dollar was also aided by Japanese Prime Minister Shinzo Abe, who has called for the Bank of Japan to raise inflation targets to 2%, weakening the Yen right across the board.