Market News & Insights
6 September 2013

ECB Succeeds where BOE Fails

EUR/USD 1.3132
GBP/USD 1.5595
GBP/EUR 1.1883 (0.8415)
EUR/CHF 1.2389
GBP/CHF 1.4722
GBP/AUD 1.7059

Yesterday’s central bank meetings were very much a case of deja vu. Both the BOE and the ECB opted to remain unchanged on their policy stance. The BOE kept rates on hold at .5% and asset purchases at £375 bln. On this occasion the BOE did not release a policy statement alongside the announcement so we will have to wait for the BOE minutes in two weeks to see how the voting was shaping up.

From Carney’s perspective there is little more he can do without signalling further asset purchases or some other measures to ease the pressure on rising rates in GBP. The new governor has made it clear that the BOE see rates at present levels until 2016/17, however the constant stream of better than expected data from the UK has markets believing the BOE’s easing exit caveats are likely to be reached ahead of that. The result is rising rates in the interest rates markets and a stronger GBP. This is not what Carney will want to see and an overly strong GBP, or a market nervous about rising rates, may hamper the UK recovery. GBP strength is here, but how long before Carney will have to act?

The ECB were slightly more successful in talking down their interest rates. Mario Draghi and the ECB made no changes to their policy, keeping rates at .5%. As always with the ECB the real fireworks came from the Press conference that followed. Draghi revised upwards GDP expectations for 2013 and upgraded the 2014 GDP estimate to 1%, following on from a strong second quarter.

Draghi was however firm in his statement commenting that rates would remain at current levels or lower for the foreseeable future. He highlighted the risk to interest rates was to the downside indicating the ECB still sees possible rate cuts in the future. He was also quick to point out that they saw no inflation in Germany, with the Eurozone composite figure remaining below the target 2% figure. As long as inflation remains below 2%, I think we can pinch the flame on any rate increases in the near future, which some market participants were calling for.

The Eurozone still has structural vulnerabilities that can easily expose the single currency to risk, Italy’s coalition government is fragile at best, Cyprus voted down the policy they require for its rescue and we are approaching a third bailout for Greece. These all have the ability to impact the regions recovery effort.

With Central bank meetings behind us, today’s focus will be on the US market and the all important Non Farm payrolls and unemployment rate. Yesterday’s ADP employment report was weaker than expected, however there is very little correlation between that and the Non Farm Payrolls. We did have weekly jobless claims and continuing claims, both beat expectations continuing the strong run of jobs data from the US. The 6 week average for jobless figures is at multi year lows so we’d expect a stronger than forecast NFP.

Today’s data should really make Fed tapering policy clear. Should we see a strong figures from the jobs data the market will be positioning itself for a September taper from the Fed. The USD has been supported by firmer data lately and todays releases have the ability to really drive USD strength.

In Europe we have releases from the UK and Germany. Industrial and manufacturing data is due from the UK, with industrial production due from Germany. German data is due to slow by .5% from June, with UK figures expected to show a slight advance in productivity. EURGBP has traded back to just short of .8400, a level not broken since January this year. Should data come out as expected and this level will come under pressure.