FED minutes raise chance of tapering in next few months. ECB considering negative deposit rates

Tom Tong21/Nov/2013Currency Updates

GBP

Plenty of movements across the markets yesterday with the spotlight on central bank sentiment towards recovery. Eyes turned to London in the morning as the curtain was raised on the much anticipated BOE minutes. Sterling initially enjoyed a rally against its most traded pairs, however the majority of these gains retraced later in the day or over the Asian trading session. Sterling popped up against the dollar and euro, accordingly it closed a whisker down on the greenback following the FOMC minutes release later in the day. In what was a torrid day for the euro, sterling held its gains and closed up against the euro.

Fundamentally Sterling is benefiting from good growth and low inflation in the UK. The BOE used yesterdays stage to again emphasise that unemployment hitting 7% will not necessarily imply that an immediate alteration of monetary policy will occur. In a clear attempt to counter the market cries of a definite early rate rise, the BOE minutes stated- “the projections for growth and inflation under constant bank interest rate underlined that there could be a case for not raising the bank rate immediately when the 7% unemployment threshold was reached”

The market continues to misinterpret the positive outlook for the UK and sterling. This may restrain gains in Sterling, however the market is still widely bullish for long term UK growth. Naturally this bodes well for sterling.

Minor data release of note today includes- Public sector net borrowing for October.

EUR

After glimmers of positive news out of the eurozone yesterday, the market was hoping that the short term may be less painful for the eurozone. Alas these hopes were quickly dashed. The Euro got hammered yesterday and was on the ropes all day, falling against it’s most traded pairs and suffering further losses over the Asian session.

The euro tumbled after the ECB report stated that the ECB is considering negative deposit rates to boost inflation closer to its target and evade the threat of deflation which led to the initial interest rate cut. Further selling pressure stemmed from the FED meeting, indicating it is considering slowing the pace of its QE via cutting interest paid to banks.

On the flip side, should the ECB decide to cut rates through cutting the rate it takes for cash held by banks overnight, it will move into negative territory. The ECB current deposit rate is 0%, a change would lead to rates at -0.1% The ECB slashed interest rates to a record low this month with Draghi saying that the central bank was “technically ready” for negative rates, should further economic woe indicate such a move was needed.

The euro crashed against its most traded pairs and had a torrid day, clearly gains can be retraced. However prior to this positive sentiment and data is needed which is proving increasingly elusive. The market still holds a bearish view for Euro long term and with the current state of affairs this appears to make sense.

Data releases of note out of the eurozone today include – PMI and consumer confidence.

USD

Solid day for the greenback yesterday with gains across the board, closing with notable gains against both sterling and the euro. Leverage taken from the release of the FED minutes, US inflation fell and improved market sentiment towards US growth, although macro U.S data still remains mixed. Dollar index seeing solid gains and rising 0.41% to 81. Dollar staying high over the Asian session and London opens with the USD well supported.

US inflation unexpectedly fell in October and the release of the FED minutes revealed that rates may stay near zero after bond buys end. Overall an eventful release of FOMC minutes with a strong dollar rally ensuing. FED still remains as coy as ever to the likely timescale for a taper in QE. Headline news from yesterday being the FED is flirting with cutting the interest it pays to banks on their reserves. Presently banks hold $2.5 trillion of US reserves. Yesterdays development was a dramatic swing in the continual pantomime that is US QE and shows the FED is open to various options.

The key aspect to be taken from the change is that it further alludes to the eventual slowing of the £85bn monthly purchase of U.S T bills and mortgage backed securities and displays the issue is under constant discussion amongst the FED. Specifically a 25 basis point cut was discussed. Curtailing the extra interest on bank held reserves would lower interest rates. Thus reducing the bank’s profits but giving an extra kick to the wider economy. The USD rallied across the board. U.S equities turned negative and bond prices extended losses.

Data release of note out the U.S today includes- initial jobless claims and PPI.

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Written by Tom Tong

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