Investors await BOE and ECB policy decisions as market looks to Draghi for plan B

Tom Tong04/Apr/2013Currency Updates

GBP

Sterling regained some of its footing on Tuesday, with the GBP/USD climbing back from a weekly low. This move was in spite of PMI Construction data printing 47.2 in March, below market expectations of 48.0, but an improvement from the three year low seen in February. The PMI has remained below 50.0, and therefore indicates a contraction in construction activity, for the past five consecutive months. However, this morning we have seen a large move lower in cable ahead the Bank of England’s meeting.
As the Bank of England (BoE) is widely expected to maintain its current policy today, we should see the Monetary Policy Committee refrain from releasing a policy statement once again, and the meeting minutes due out on April 17 may show another 6-3 split as above-target inflation in the U.K. limits the central bank’s scope to expand the balance sheet further.

EUR

The euro climbed yesterday, making its biggest weekly gains, as the headline reading for euro-area inflation grew an annualized 1.7% in March amid forecasts for a 1.6% print, while the International Monetary Fund (IMF) announced it would contribute about EUR 1B to the EUR 10B bailout for Cyprus.
In response, Cyprus Finance Minister Haris Georgiades pledged to implement the deal fully and without derogations, and will seek a swift ratification of the rescue package as the banking crisis renews the threat for contagion.
Markit Services PMI for March from Germany, Italy and the Euro Region are expected to print lower today. We are also expecting volatility around the ECB interest rate decision. Although the ECB is widely expected to keep the benchmark interest rate at 0.75%, President Mario Draghi may sound more cautious this time around as the on-going turmoil in the peripheral countries raises the risk for a prolonged recession. As the economic downturn threatens price stability, we may see a growing number of ECB officials show a greater willingness to push the interest rate to a fresh record-low, and the central bank may continue to carry out its easing cycle over the coming months in an effort to steer the region out of recession. Draghi may look to unconventional tools, as analysts are looking for him to offer a plan B, as credit struggles to flow to small and medium size companies in the peripheral nations despite records low central bank lending rates.

USD

The greenback lost ground yesterday morning as the U.S. Dollar Index slipped towards the weekly low, this move was due to the drop in the ADP Employment report which fell short of market expectations as private payrolls increased 158K in March amid forecasts for a 200K print. Yesterday, the ISM Non-Manufacturing report showed service-based activity expanding at a slower pace as the gauge fell back to 54.4 from 56.0 during the same period.
This morning the US dollar Index has increased more than 2% as Bank of Japan Governor Haruhiko Kuroda began his campaign to end 15 years of falling prices by doubling monthly bond purchases in a bid to reach 2 per cent inflation in two years.

Eyes will be on Fed Chairman Bernanke today as we anticipate initial jobless claims which are expected at 350k from 357k the previous month, positive data would prompt central bank officials in scaling back their willingness to expand the balance sheet further.

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Written by Tom Tong

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