Markets await ECB interest rate decision

Tom Tong02/May/2013Currency Updates

EURO

The shared currency has gained against the greenback in the previous five months, and in the previous month had managed to climb 3%.

The main focus within Europe will be largely directed towards the potential cut on the interest rate by the ECB. Currently the rates are at 0.75%, but further reductions would see that figure decrease to 0.5%. However, there are concerns that a rate cut would not feed through to struggling economies, with lenders still concerned about the economic vitality of the eurozone periphery.

Mario Draghi has indicated the expectation that officials will implement an interest rate cut today even as they doubt its impact. The president of the ECB is ready to take action if Europe’s economic outlook continues to deteriorate. Following a month where inflation took a plunge and economic confidence slumped.

Markets are likely to react positively to a cut, but it is not clear what impact, if any, the move will have on the real economy.The ECB is due to announce its decision at 12:30 BST

GBP

Last month, the manufacturing PMI unexpectedly rose to 49.8 instead of holding steady at 48.6. A 50.0 reading signals expansion; however, it was far better than was predicted. Today, the UK will roll out another PMI report; this time for the construction industry. It’s expected to reveal an increase from 47.2 to 48.1.

The next Bank of England governor, Mark Carney, endorsed on Wednesday the idea of sometimes letting inflation run above target for longer than normal, while also warning of the risks to credibility if this is taken too far or done too often.

The current environment is poise for GBP, with better data prints, a quiet period before Mark Carney takes over as Governor of the BoE, and broad based USD weakness.

USD

The greenback was hit hard by most of its major counterparts yesterday after the US released dollar-bearish reports. Yesterday’s ADP report showed that only 119,000 payrolls were added last month, which was much less then the 154,000 figure that many had expected. Meanwhile, the manufacturing PMI came in at 50.7, which is closer to the contractionary boundary than last months 51.3 reading.

The US federal Reserve suggested last night that it could increase the pace of its quantitative easing programme if the economy’s recovery proves more sluggish than expected. After the bearish releases, the Fed said it will stick with its QE schedule but stands ready to put its foot on the gas if need be. The view is that labour market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated.

In terms of data coming out of the US today – we have the initial jobless claims for April and the USD trade balance for March.

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Written by Tom Tong

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