UK MPC and ECB meetings today as market confidence in Greek bond swap deals creeps up

Tom Tong08/Mar/2012Currency Updates

GBP

Sterling was weighed down versus the dollar on Wednesday with risk sentiment precariously balanced and investors reluctant to buy the currency, which is set to remain under pressure owing to the fragile UK economy and a weak technical outlook. The BofE will hold an interest rate meeting today. Recent positive UK data releases have dampened prospects for more monetary easing from the Bank of England, whose Monetary Policy Committee is widely expected to keep interest rates on hold and refrain from further asset purchases in its monthly policy announcement. However, UK growth is still slow at best and inflation will be seen falling back towards the Bank of England’s target, and more asset purchases could still be on the horizon.

USD

The U.S. dollar retreated on Thursday, with investors increasingly confident of private-sector participation in a Greek bond-swap deal. This was coupled with a report that cited U.S. Federal Reserve officials saying they are considering a new bond-buying program to support the fragile U.S. economic recovery, a move that would undermine the currency’s value. The dollar fell on the ICE index against a basket of currencies.

Rising tensions between Iran and the West are overwhelming a bedrock principle that has dominated the oil market for nearly a decade: Oil prices move in the opposite direction of the dollar. U.S. oil prices have climbed 12% since early November, with most of those gains coming after U.N. inspectors issued a report saying they suspected Iran was renewing efforts to produce nuclear weapons. The dollar also has strengthened over that period, gaining 4.8% as measured by the ICE U.S. Dollar Index, which weighs the dollar against a basket of other currencies.

Positive US data also helped risk sentiment as the ADP private sector employment report yesterday showed that 216,000 jobs had been added during February. This was more than expectations and higher than January’s revised figure of 173,000, setting the stage for tomorrow’s crucial US non-farm payrolls.

EUR

The euro edged higher as market participants grew increasingly confident that enough bond holders will participate in Greece’s debt swap to get the deal done. As further commitments from bond holders were made public, confidence mounted that Greece will get the swap completed on time. Completing the debt swap is considered vital because it is necessary for Greece to reduce its long-term debt and receive another bailout. It rallied from a two-week low against the dollar as investors with 58 percent of the Greek bonds eligible have indicated they’ll participate in the so- called private-sector involvement of the nation’s bailout.However, regarding inflation, the ECB is likely to lift its 2012 forecast above the 2 percent price-stability threshold today, limiting its ability to cut interest rates further even as it lowers the outlook for growth, economists said. The decision is due at 1:45 p.m. and ECB President Mario Draghi will unveil the bank’s new economic projections at a 2:30 p.m. press conference.

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Written by Tom Tong

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