Foreign Exchange News
5 July 2013

ECB and BOE Set Off Their Own July 4th Fireworks

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EUR/USD 1.2886
GBP/USD 1.5011
GBP/EUR 1.1643 (0.8590)
EUR/CHF 1.2354
GBP/CHF 1.4383
GBP/AUD 1.6372

As we expected Mark Carney’s first outing with the BOE provided some fireworks away from the US July 4th celebrations, we speculated that the BOE would release a statement providing some form of guidance or intent and we were not let down. The BOE kept interest rates on hold at .50% with no change to asset purchases but what really grabbed the markets attention and started a huge sell off in GBP was voiced concerns about rising market interest rates.

Global rates have been rising since the Fed began discussing tapering, and rising rates in the UK are not reflective of an improved economy and in fact will only serve to hamper recovery. This apparently is a concern for the BOE and certainly indicates the BOE will in fact go down the forward guidance route, we’d expect to see far more clarity on this in the August meeting once Carney has time to bed in. What form of guidance we might expect is unknown but we feel it’s likely it will be something similar to the US, possibly setting target for unemployment, inflation, wage growth or even GDP.

The bigger shock came from the ECB, although maintaining rates at an all-time low of .50% they broke from their mantra of never pre committing to policy and gave indication of future forward guidance from the ECB , Draghi saying they expect …”key ECB interest rates to remain at present or lower levels for an extended period of time”. This is a huge step from the ECB and Draghi was keen to express their decision on forward guidance had nothing to do with the BOE’s move, although the causation is likely the same and that is rising rates as a result of possible Fed tapering putting pressure on recovery.

Draghi fell short of giving exact guidance targets and is unlikely to do so but this ushers in a new era for the Eurozone and the ECB. It is worth noting that he mentioned rates could go lower and this was discussed, we feel there is a strong probability of a rate cut in the September meeting but we will be watching developments on this front closely. Needless to say this put pressure on the EUR as it lost ground against most of its major counterparts with the exception of the pound.

The US session was quiet as they celebrated their Independence Day, with markets closed. There has been a role reversal today with the European calendar offering very little to feed market appetite but we only have to wait until the US open as we await key employment data with the Non Farm Payrolls. The Fed has made no secret on their desired levels to begin tapering, job growth has been steady in the US but by no means exceptional.

We expect 165,000 jobs to be added to the US economy during May with a small decrease in the unemployment level to 7.5% from 7.6%. This result will be key to USD direction going forward, a strong reading and fall in the unemployment rate will see the USD rally continue, and more than likely gather pace.

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