MPC hold interest rates and QE

Tom Tong13/Jan/2012Currency Updates

GBP

The pound fluctuated with little affect against the US dollar and slipped to a seven week low versus the euro yesterday on speculations that the UK central bank may increase quantitative easing and readjust interest rates. However the Bank of England reserved the right to keep the official interest rate at 0.5% and maintained the asset purchase facility at £275 billion. The move was predicted by some analysts but it hasn’t closed the door to more easing in the future, The Bank of England will try to avoid recession at any length. Draghi’s optimistic view of stabilisation in the Eurozone added to the slump.

EUR

Yesterday, the ECB with a 23-strong governing council decided unanimously to leave its main interest rate unchanged at the record low of 1%. Mr Draghi also indicated that the Euro averted another credit crunch after the previous months liquidity offered to banks. He also stated, contrary to earlier suggestions, that the facility was in fact used by banks to lend to each other and also buy eurozone sovereign debt. Mr Draghi also forecast that there would be substantial demand in a second offer of 3 year loans next month when a broader range of assets would be eligible as collateral. Indeed after successful Italian and Spanish bond auctions, the debt crisis was eased. It seems that the markets have taken well to Mario Monti’s plan to reduce Italian debt as Italy sold more bonds than expected; likewise Spain sold twice the maximum target. This helped the euro extend gains against the dollar today as the euro rose 0.4 percent to , pulling away from a 16-month low hit earlier in the week. This also assisted the euro to hold steady against other major currencies in Asia such as the Yen which traded at 98.39 yen in midday Tokyo, compared with 98.38 yen late Thursday.

USD

The Greenback declined against most of its major counterparts in overnight trade as Asian stocks advanced, sapping demand for the go-to safe haven currency. Later in yesterdays trading session, the University of Michigan gauge of US consumer confidence is expected to rise to the highest in seven months whilst the euro strengthened against the dollar, extending its first five-day gain in six weeks, before Italy sells debt and after European Central Bank President Mario Draghi said policy makers have averted a credit shortage.

Additionally, the fourth-quarter earnings report from JP Morgan Chase today is expected to provide interesting reading with earnings expected to drop 34.7 percent to $0.901 per share. The forward-looking guidance component of the report ought to prove most interesting however as traders look for insight on US banks’ vulnerability to Eurozone sovereign stress.

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Written by Tom Tong

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