Single currency falls as ECB aims to address "excessively low" inflation
10/Oct/2014 • Currency Updates•
A good start to the day saw the Pound rise on the Dollar, however, as the afternoon progressed the Dollar strengthened and cable fell by 0.35% overall.
As expected the Bank of England maintained its 0.5% interest rate that has stood since March 2009, as Eurozone weakness and low inflation weighs on the UK. Despite the MPC being split on their interest rate vote for the second month in a row in September at 7-2, inflation has been weaker than the committee expected having fallen to a five year low of 1.5% in August, with the economy appearing to be cooling off. Additionally, the Asset Purchase Facility, the value of money injected into the economy through open market bond purchases, remained consistent at £375 billion, the same value since July 2012.
Today at 9.30am will see the announcement of the balance of trade figures for the UK for August. Last month’s data, released by the Office of National Statistics, showed that the total trade deficit climbed substantially to £10.2 billion, although such a large MoM decline is not expected this month.
The Euro’s mini run against the Pound came to an end yesterday as Sterling gained on the single currency for the first time this week, appreciating by 0.35%. Trade balance data coming out of Germany disappointed by showing a decrease in the countries trade surplus after exports declined by the greatest amount since January 2009. The trade balance for August fell from €22.2B to €17.5B, and contributed to the single currency falling 0.7% on the Dollar.
No substantial movement of the Euro in the FX markets after the ECB monthly report was released yesterday. The report reiterated the Governing Council’s decisions taken at the policy meeting at the start of the month including details of the covered bonds and asset-backed securities purchase programs geared towards boosting inflation to the 2% target.
Speaking on Thursday, the ECB President Draghi offered firm assurance to the Eurozone that the central bank will be successful in its attempt to boost inflation from its “excessively low” levels and that it is willing to enact more monetary stimulus if required. The lending and private asset purchase plans put in place by the ECB should have a “sizable impact on the ECB’s balance sheet” according to Draghi and thus eventually boosting inflation.
After last night’s decline following the release of the Federal Reserve minutes, the Dollar stabilised against its major counterparts during London trading on Thursday, with the US Dollar Index showing an overall sign of strength by increasing 0.6%.
This improvement was aided by the release of some more positive data from the US. Initial jobless claims released by the US Department of Labor showed the number of people filing for first time claims for state unemployment insurance declined this month to 287,000, a figure less than last month, and 7,000 lower than what economists had estimated. Similarly, continuing jobless claims, measuring the number of individuals currently receiving unemployment benefits, also dropped MoM to 2.381M. Again this was substantially lower than what economists had expected, with a figure in the region of 2.41M widely predicted.
Rest of the world
India’s Rupee increased by the most in two months against the Dollar, rising by 0.6% on the back of continued speculation that the Federal Reserve will restrain from raising interest rates. The Fed’s comments during their FOMC minutes have provided comfort to emerging markets such as India as market participants do not want interest rates to increase on liquidity concerns. The currency has performed well of late and has now advanced on the greenback by around 1.2% this quarter.