Central Banks loosen policy to boost struggling economies, as all eyes now fixed on non-farm payrolls

Tom Tong06/Jul/2012Currency Updates

EUR

The euro fell broadly yesterday against all majors. This was in no small part due to the ECB’s, albeit widely expected, decision to cut interest rates to 0.75%. The European Central Bank’s step into the world of zero interest rates is fuelling speculation it may eventually be forced to follow the Federal Reserve and the Bank of England with large-scale asset purchases. Arguably, this is the main reason for the drop in euro strength as the forecasted interest rate drop would have been factored-in by traders. The euro hit a five-week low against sterling, taking it close to a low reached in mid-May, below which would mark its weakest since the aftermath of Lehman’s collapse in 2008.

No overly substantial data is released in the common currency zone today. However, the events of yesterday will still have knock on effects to today’s trading, and smaller data released today is forecasting to show that industrial production in Germany and Spain declined last month.

At the ECB meeting yesterday, the economic climate was summarised: “Downside risks to the euro-area economic outlook have materialized,” ECB President Mario Draghi said yesterday after cutting the main refinancing rate by a quarter-percentage point to a record low and reducing interest on overnight deposits to zero. “Economic growth in the euro area continues to remain weak with heightened uncertainty,” he said.

GBP

Sterling came close to its highest in three and a half years against the euro on Thursday as an expected decision by the Bank of England to inject more stimulus into the economy was offset by a eurozone rate cut which sparked sharp falls in the euro.

The BoE increased asset purchases under its quantitative easing programme by 50 billion pounds in order to aid a flagging economy, sparking relief among some traders who had anticipated a 75 billion pound injection and possibly an interest rate cut. But attention soon turned to a move by the European Central Bank to reduce its main interest rate by 25 basis points to 0.75 percent and cut its deposit rate to zero in an attempt to revive a deteriorating eurozone economy beset by debt problems.

USD

The dollar was given a boost after the European Central Bank (ECB) cut its key interest rate from 1% to 0.75% in a bid to energise struggling eurozone economies. The British pound also fell against the dollar on Wednesday. The pound’s weakness came after the Bank of England decided to purchase another 50 billion pounds in government bonds from financial institutions.

The US Dollar Index rose for a second consecutive session on Thursday, though this climb is still lacking for conviction (traders would use the word ‘momentum’). Taking a look at the fundamental backdrop, general risk trends tell the story. While the S&P 500 slid over the same session – boosting the greenback’s safe haven appeal – the slip follows a string of consecutive advances and did little to pull us back from a two-month high.

All eyes today will be firmly fixed on US Non-Farm Payroll data, due out at 1.30pm BST. Labour market indicators from yesterday are pointing towards a positive figure, as yesterday we saw ADP Non-Farm Employment Change surprise greatly to the upside, as well as US Unemployment Claims.

Print

Written by Tom Tong

Vestibulum id ligula porta felis euismod semper. Donec ullamcorper nulla non metus auctor fringilla. Cras justo odio, dapibus ac facilisis in, egestas eget quam. Morbi leo risus, porta ac consectetur ac, vestibulum at eros. Donec ullamcorper nulla non metus auctor fringilla.