BOE and ECB keep rates on hold as markets focus on Non Farm payroll figures

Tom Tong05/Apr/2013Currency Updates

GBP

The pound showed a delayed reaction to the BoE’s announcement that they will not extend stimulus, and made its strongest daily gains against the US dollar for the week. However, sterling remained neutral against the euro despite a lot of volatility in the session.
The Bank of England kept its asset purchase target unchanged in its April meeting, as the UK PMIs signalled the economy may return to growth in Q1 and actually avoid a triple dip recession. The Monetary Policy Committee decided to keep the interest rate at 0.50%, as was expected.

In March, calls to raise stimulus were outvoted by 6-3 in the MPC. BoE Governor King was one of the losing votes calling for a 25 billion Pound raise to the asset purchase target. There were worries in March that further stimulus could lead to an unwanted drop in pound, which could weaken local demand on higher import prices. The UK’s 2.8% annual inflation rate, which is well above the 2.0% BoE target, has discouraged further quantitative
easing.

EUR

The euro hiked the most in months against the dollar after the European Central Bank held interest rates at 0,75% and ECB President Mario Draghi said policy makers are “ready to act” if the region’s economy declines further.

At the past several meetings, Draghi emphasized that the eurozone economy would recover later in the year, but as several key PMI readings – especially those in Italy, France, and Spain – have plunged to multiyear lows , so the ECB’s tone has changed to top the downside with a weaker outlook for the second half of the year.

In the absence of a rate cut, President Draghi’s stance was much more dovish. He said that policy would stay accommodative as long as needed, implying that rate cuts down the line shouldn’t be ruled out. It is very possible that the ECB cuts rates in either May or June, as eurozone inflation risks remain broadly balanced.

Today euro region GDP is the main figure to be released, with both consensus and previous releases showing a -0.6%, accompanied with the Retails Sales with an expected -0.2% from a previous 1.2%. Another important figure is the German Factory Orders with an expected 1.2% from a -1.9% the month prior; if the German numbers do not make consensus then we can expect the euro to come under pressure.

USD

The dollar index climbed yesterday in the earlier London session to an 8‐month high after BoJ Kuroda announced the unprecedented economic stimulus measures of doubling the easing program that tend to devalue the currency. During the trading day it lost half its earlier gains after the ECB President said it will be ready to act if further economy sinking.
US economic data releases this week have been mixed, with disappointment from both the manufacturing and non‐manufacturing ISMs, the ADP employment and from yesterday the Job initial claims, which jumped slightly; however factory orders, vehicle sales and construction spending all proved reasonably strong.

The key metric for Fed expectations and the USD will be today’s nonfarm payroll figure, which is expected to drop to 200K from 236K prior. It should be in accordance with the trend of the unemployment rate, which has either consensus and previous a 7.7% number.

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Written by Tom Tong

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