EUR falls across the board as Draghi reiterates low interest rates
06/Sep/2013 • Currency Updates•
Whilst sterling rallied yesterday and reached its highest level against the euro since 6th May, the cost of British Government’s 10 year debt spiked to a two year high as markets read into fresh signs that easy money could begin to disappear sooner than expected. Nevertheless, the pound has strengthened 7% over the last six months, the best performer among 10 developed-nation currencies.
The steady increase in positive data from the UK is putting a handicap upon BoE Governor Mark Carney’s plans to hold interest rates at their current historic lows until 2016. Yields on the Treasury’s 10-year gilts climbed 0.13 percentage points to 3.01% yesterday, breaking through the 3% mark for the first time since July 2011. Five-year yields also rose, up 0.15 percentage points to 1.79%. The price of UK-gilts has been steadily falling since May, with the amount of interest made on government debt climbing upwards. With £1.315 trillion of gilts in issue, a major change in their price and yields could have serious effects for the UK economy.
The BOE’s Monetary Policy Committee made no change to interest rates yesterday. The absence of any comment expressing concern about the recent rise in market interest rates left some market participants disappointed. Governor Mark Carney has warned that the BOE is ready to step in with new stimulus if market expectations start threatening the fragile UK recovery by pushing up the cost of loans for households and businesses.
Today will see the release of UK manufacturing data, expected to have increased 0.2% after climbing 1.1% in June. A separate report is expected to show the UK’s trade deficit increased to £8.2bn in June. The most important Tier Three data released today is the Consumer Inflation Expectations release by the BOE, previously coming in at 3.6%.
ECB President Mario Draghi took centre stage in the eurozone yesterday following the decision to hold interest rates at present or lower levels for an extended period of time. There was further talk of a possible rate reduction as Draghi considered instability in the Middle East could cause market volatility and inflate European prices. Although the ECB raised its economic growth forecasts for the year, it projects lower GDP growth in 2014 of 1%, as opposed to an earlier estimation of 1.1%.
Following a run of relatively promising data from the eurozone recently, markets reacted to the dovish comments made by Draghi with the single currency pushed down 0.5% against the pound, and 0.7% against the dollar.
In addition, Sweden’s krona fell as its central bank left interest rates unchanged, with the possibility of further cuts down the line.
The European bond market saw increasing yields across the board.
There are no significant data releases from the Eurozone today. Next week, Germany releases its CPI figures YoY and the ECB’s monthly report is published on Wednesday.
The dollar ends the week with all eyes keenly focused on the Non-Farm Payroll. The greenback rose to a seven week peak against the common currency yesterday. The release of non-farm payrolls today is anticipated to show an increase of 180k US employers added, compared to July’s figure 162k. The dollar was further supported by a rise in US two-year debt yield, which hit a more than 2-year high.
Tier 1 data released yesterday in the form of Non-farm Productivity rose from -1.7% to 2.3% for Q2 which indicates a possible positive change in GDP. Despite ISM non-manufacturing PMI not being as influential as ISM Manufacturing, there was also a rise from 56.0 to 58.6. The most significant data release today from the US is the Non-farm payrolls and US unemployment rate. As a result, US dollar fell over the expectation of a decrease in unemployment which could result in reducing the economic stimulus.
The world leaders met for the G20 summit last night, to discuss economic agenda, yet it has been overshadowed by the Syrian crisis. However, the market is cautiously concluding that any military action will have limited impact on the world economy.