The Bank of England surprised absolutely nobody yesterday as they kept their benchmark interest rate at 0.5%
• ECB pull through – bond-buying scheme announced.
• Eurozone growth projections downgraded – Interest Rates held at 0.75%.
• BoE holds interest rates – no more QE either.
• US Data improves slightly – Fed stimulus less likely.
The Bank of England surprised absolutely nobody yesterday as they kept their benchmark interest rate at 0.5% and refrained from adding to their current £375 billion asset purchasing target. The UK Central Bank did not accompany their announcement with a statement and appropriately markets did not deem it necessary to react to the news with any significant venom.
Yesterday European Central Bank President Mario Draghi confirmed that the Central Bank was planning to unveil a radical bond-buying programme in an attempt to cut the deficit between core and periphery Eurozone debt yields. His statements fell in line with Wednesday’s leak and carried these main points:
1 ) The programme will consist of ‘Outright Monetary Transactions’ (OMTs).
2 ) The procedure will fall under the Central Bank’s mandate as it will be carried out in the secondary bond market.
3 ) It will aim to prevent market sentiment from dragging the Eurozone further into trouble by acting as a credible backstop.
4 ) The scheme is subject to conditionality which means that sovereigns will have to ask for assistance, and it will only be given in return for economic reform.
5 ) Short-term bonds will be bought – up to 3-years in maturation.
6 ) The ECB will not automatically rise to the top of the pecking order in terms of repayment, in other words the ECB will not hold seniority.
7 ) The scheme will not cause inflation to rise, as the money that is pumped into the bond market will be taken out in equal portions from somewhere else.
8 ) There will be no specified bond cap.
All in all the announcement was taken as a positive sign, worldwide stocks rose and Spanish and Italian debt yields declined, however the Euro was unable to build upon Wednesday’s performance and post any more significant gains. The Pound to Euro exchange rate fell by around 0.4 cents as the press conference began, but spiked up by around 0.8 cents as Draghi revealed that the Governing Body had not voted unanimously in favour of the programme. No surprises who the unhappy party were…(the Bundesbank!) but as markets digested the opposition from Germany, in relation to the announcement as a whole, the Euro grew slightly to post a modest daily gain of 0.2 cents.
In other news the ECB decided to maintain their current benchmark interest rate of 0.75% and announced that they were slashing Eurozone growth projections for 2012 down to -0.4% from -0.1%. Confirmation that the 17-nation bloc contracted by -0.2% in the second quarter suggested that the currency bloc may slide into a double-dip recession later on in the year.
Hopes of a return to the Federal Reserve’s easing cycle were hurt yesterday as the US Manufacturing Composite grew by more-than-expected from 52.6 to 53.7 in August, US Initial Jobless Claims fell from 377,000 to 365,000, and US Employment Change increased from 173,000 to 201,000.
However the strengthening in US ecostats was unable to compete with the risk appetite-tempting ECB announcement and the Pound managed to appreciate in value by just under 0.4 cents against the US Dollar. Although demand for the safe haven US currency weakened, Sterling was unable to break through tough resistance levels at the 1.5940 mark.
Although the Canadian Dollar performed well against its North American counterpart, the US Dollar, the rise in risk appetite appeared to benefit the Pound more than it did the ‘Loonie’. With the Bank of England holding rates steady and avoiding further stimulus measures, Sterling was able to reverse Wednesday’s 1.3 cent Canadian Dollar gains and bring GBP/CAD back to Tuesday’s closing levels at around 1.5660.
The Australian Unemployment Rate defied analysts’ expectations of a 0.1% increase by posting an encouraging decline to 5.1%. The news sent the ‘Aussie’ up by 0.5 cents against the Pound during the early hours of yesterday morning.
During the afternoon the Sterling / Australian Dollar rate declined by a further 0.7 cents as Mario Draghi unveiled his bond intervention scheme. The programme, which is designed to bring down the yield on sovereign debt yields and therefore stem the deterioration in southern Europe, was viewed by markets as highly supportive of the high-risk Australian Dollar.
New Zealand Dollar
The New Zealand Dollar ended its month long slump against the Pound yesterday and posted a potent 1.25 cent gain against the British currency. The move was largely in response to the ECB’s bond-buying programme, which markets treated as positive for the commodity-correlated, and therefore sentiment-driven, New Zealand Dollar.
Data Released Today
09:30 GBP BoE/GfK Inflation Next 12 Mths (AUG)
09:30 GBP Industrial Production (YoY) (JUL)
09:30 GBP Manufacturing Production (YoY) (JUL)
13:30 CAD Net Change in Employment (AUG)
13:30 CAD Unemployment Rate (AUG)
13:30 USD Change in Non-farm Payrolls (AUG)
13:30 USD Unemployment Rate (AUG)
- Pound to Euro, US Dollar exchange rate: A strong Spanish debt auction sent the Pound to Euro exchange rate down by around 0.5 cents yesterday
- Pound to Euro, US Dollar exchange rate: The Pound was able to benefit from the Bank of England’s decision
- Pound to Euro, US Dollar exchange rate: Bank of England Governor Mervyn King warned that the UK economic outlook is getting worse
- Pound to Euro, US Dollar exchange rate: The Pound broke back above 1.2600 against the Euro
- Pound to Euro, US Dollar exchange rate: The Pound staged an impressive set of rallies against all of its major currencies peers, bar the Euro