Draghi Continues Agressive Approach annoucing he will Flood the banks with Cheap Money

Tom Tong24/Sep/2013Currency Updates

GBP

The pound has continued to appreciate amidst its recent economic strength. Against all 16 major currencies, sterling has risen by at least 1% over the last 6 months. Sterling tipped an 8-month high last week against the dollar and with further improvements expected in GD, House Prices and Consumer Confidence this week, a challenge to this benchmark is not out of the question.

There were no economic reports released from the UK yesterday to influence the pound’s direction.

No economic data of importance released today, other than BBA mortgage approvals which is expected to increase to 38,600 from 37,200 previous.

USD

Following last week’s dramatic session, the dollar remained relatively subdued in yesterday’s trading. A number of speeches by Fed officials on Monday presented contrasting views as to the Central Bank’s decision to maintain its monthly bond buying program at $85bn.
New York Fed President William Dudley, a key ally of the Reserve’s Chairman Ben Bernanke, considers the U.S. economy still too weak for it to begin tapering and that it still requires ongoing support with regard to its monetary policy. Dennis Lockhart, President of the Atlanta Fed, further commented the country is losing some of its “economic dynamism” following a recent cooling in growth. Richard Fisher on the other hand, President of the Dallas Fed said the decision not to taper the QE program has impaired the Central Bank’s global credibility.
U.S. data released on Monday included an initial reading of Markit’s flash manufacturing PMI, which fell for the second straight month – down from 53.1 in August, to 52.8 in September. While the data were on course for a “modest improvement” in manufacturing conditions, certain categories such as the employment gauge, hit multi-month lows.
According to Bloomberg’s Correlation-Weighted Indexes, the greenback has fallen 3.3% the past three months against a basket of nine other developed-nation currencies. Positive manufacturing data from China further impacted dollar movements yesterday, with releases suggesting a stabilisation in growth in the world’s second largest economy.
Today, the U.S. releases its Consumer Confidence report for September, expected to have decreased to 79.8 from a previous recording of 81.5. On a positive note, reports are expected to show gains in U.S. home prices, which is an evidence that the economy may be strong enough to weather a reduction in its stimulus program.

EUR

Biggest news out of the eurozone is still Angela Merkel’s historic third term win in German elections on Sunday. Despite Merkel’s success, one factor that could hinder her policies is the change in coalition partners. Angela’s former coalition partners FDP (Free Democratic Party) saw a disaster leaving it with no national representation in parliament. With the amount of negative feeling in Germany over the last few months it will be pleasing for the rest of the eurozone to see Merkel voted back in so convincingly, possibly indicating the Germans haven’t lost their appetite for supporting the eurozone yet.
Draghi continued with a dovish approach by announcing that he intends to keep interest rates low until there is a significant improvement within the economy. This is set to be achieved by repeating policy of ‘pumping banks full of cheap money, should the circumstances require the extra support of lenders’ and has indicated that he is open to using another Long-Term Refinancing Operation (LTRO) if required in order to manage inflation.

PMI released yesterday came out at 52.1 indicating strongest growth since 2011. Seems this has been a knock on effect in the eurozone with France also seeing a rise in PMI figures coming in at 50.2, the first rise in 19 months. With Manufacturing and services gradually picking up speed in terms of recovery, PMI data releases suggest we could begin to see unemployment falling.

There is only tier 2 data being released out of the eurozone this morning, German IFO Business Climate numbers.

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Written by Tom Tong

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