GBP/EUR 1.1708 (0.8542)
It’s a busy week ahead with a raft of releases and interest rate decisions in the Eurozone & the UK. This morning have already had Australian retail sales come in lower than anticipated by 0.2% as the Australian dollar continues to lose ground against the US currency. If we look at the weeks headline releases and to Europe first, the ECB’s Governing Council will most likely keep all policy rates unchanged at its June meeting, while leaving all options on the table for the future, depending on the data. This is the result of slightly improving economic indicators (a rebound in both confidence surveys and inflation in May) and tactical considerations (the proximity of the last rate cut and the willingness to keep some powder dry).Staff forecasts could see the median projections for GDP being lowered again, albeit only modestly to around -0.6% in 2013, but this would most likely reflect past weaknesses (which was the main factor behind the May rate cut) rather than a change in scenario. The ECB will be likely to continue to expect a modest recovery to take shape in H2. Meanwhile the focus should remain on new initiatives to support SMEs as the ECB ponders its options while avoiding any direct involvement at this stage. All this does not necessarily mean that the ECB will disappoint. At the very least, the ECB should keep a dovish bias and stand “ready to act”, suggesting that a Refi rate cut in July cannot be ruled out.
The Bank Of England will keep its target for asset purchases unchanged next week after industry reports that are forecast to point to an improving economic recovery, according to surveys of economists. The nine-member Monetary Policy Committee led by Governor Mervyn King, will keep quantitative easing at 375 billion pounds ($569 billion), according to the median of 43 economists in a Bloomberg News poll. The MPC will also keep its benchmark interest rate at a record-low 0.5 percent, another survey shows. The meeting will be King’s last before he retires and hands over to Bank of Canada Governor Mark Carney on July 1. With Inflation above the BOE’s target, King has been defeated for the past four months in a bid to expand QE as the MPC majority cautioned against the danger of stoking price expectations.
Recent weeks have brought a change in tone from the Fed, with a number of FOMC policymakers indicating a willingness to slow the pace of asset purchases in the coming months. A review of Fed communications suggests that the recalibration of the message does not stem from a perceived diminution of benefits from the current policy stance; the FOMC has cited improvements in interest-rate sensitive sectors like housing and auto as evidence that policy is working. Furthermore, asset purchases have supported risk markets, improving the net wealth position of households which can be viewed as having partially insulated consumption from the full impact of higher taxes. Nonetheless, the presence of a considerable fiscal drag suggests the Fed’s outlook has not improved markedly.
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