Euro drops as central banks maintain monetary policy

Claire Hogarth08/Aug/2014Currency Updates

GBP

Sterling rose 0.2% against the euro and remained fairly flat against the dollar following the central bank data releases. As anticipated the Bank of England kept interest rates at 0.5 and maintained its Asset Purchase Facility at £375B.

Ultimately we are unlikely to see any major pivots as a result of the UK’s central bank policy until the BoE’s new economic forecasts are released next week. We are however seeing increasing speculation that, off the back of six consecutive quarters of positive GDP figures and subpar inflation, the members of the Monetary Policy Committee may begin to split from the party line on interest rates in the next meeting.

Slack in the labour market and the lack of wage growth, now at its lowest level since 2001, will weigh heavily on those favouring earlier than anticipated rate hikes. However jeopardising a recovery that led to the IMF predicting UK GDP of 3.2% for 2014, due to fears of losing control of inflationary pressures, may seem premature.

Today we have figures for the UK balance of payments and little else of note.

EUR

The European Central Bank also kept its interest rates steady, with lending at 0.15% and deposits held with the central bank at -0.1%. Mario Draghi spoke immediately afterwards at his monthly news conference, with his bearish tone on the euro pushing the currency down further. Market expectation is for the real interest rate in Europe to remain negative for much longer. Draghi characterised the Eurozone’s recovery as ‘weak, fragile and uneven.’ Draghi also acknowledged the weight of geopolitical risk the conflict in Ukraine is creating. It seems clear that his intention was to drive the euro lower by emphasising that the trading bloc’s weak fundamentals are insufficiently priced into the market.

Elsewhere, German MoM Industrial production for June disappointed at 0.3% a full per cent below expectation, whilst Spanish Industrial output slipped from 2.5% to 0.8%, echoing Draghi’s bearish euro sentiment.

USD

The dollar hit highs against the euro not seen since 2013 following Draghi’s indication that he will continue the divergence in central bank policy across the Atlantic over the foreseeable future. The greenback was further boosted by a drop in unemployment claims as initial jobless claims fell below the 300k threshold from 303k to 289k in the last week of July in spite of the expectation for an up-tick. This is the second time in three weeks that the US labour market broke the sub 300k barrier thanks to a growth in hiring and a reduction in layoffs. The average of new claims over the past four weeks dropped by 4,000 to 293,500, reaching the lowest level since February 2006.

Last night we saw Asian shares tumble following President Obama’s announcement that he will authorise air strikes in Iraq in an effort to quell the ISIS insurgence.

Non-farm productivity and inventories data in the afternoon are unlikely to affect the currency markets.

Rest of the World

The world’s worst performing currency of the year, Ghanaian New Cedi, has contracted 36% against the dollar this year, following ballooning public spending and the current trade deficit breaking 10%. Reversing last week’s rhetoric that he would reject emergency loans from the IMF, President Mahama reacted to deeper drops in the nation’s Eurobond yields by opening discussions with the Bretton Woods institution on Monday. Yesterday he confirmed that Ghana’s government is open to accepting IMF support in spite of the institution’s historically stringent borrowing conditions on beneficiary nations. These are likely not only to enforce new regulations on Ghanaian monetary policy but also its fiscal set-up over the next 2-3 years.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.