The Euro was unable to break resistance in the region of 1.33 against the Dollar.
Sterling / Euro and US Dollar exchange rates
The Pound rallied against the majors, rising to daily highs versus the Euro, U.S Dollar and Australian Dollar, after the Bank of England interest rate announcement at midday on Thursday. The MPC has sanctioned a further £50 billion of bond purchases, taking the total amount of quantitative easing to £375 billion, as officials look to limit the impact of the Euro-zone debt crisis on the UK economy.
The outcome of the decision had largely been factored into the market. There were suggestions that the MPC wouldn’t act this month due to the recent positive tone of economic reports on manufacturing and service sector growth. However, the UK economy contracted in the fourth quarter and the BoE have taken the decision to implement further quantitative easing in anticipation of a technical recession.
There was a sense of relief that policy makers only sanctioned £50 billion worth of bond purchases, amid speculation that a greater amount could be announced and the Pound subsequently rallied as a result. The UK currency reached a high of 1.1980 against the Euro, prior to the ECB interest rate announcement and the Pound declined towards the close of trading last night, as news broke that Greek leaders had reached an agreement on austerity measures needed to warrant a bailout.
The Bank of England also kept interest rates unchanged at 0.5% and in the accompanying statement, the bank stated that weak economic growth was likely to push inflation below the 2% target over the next two years and there was also speculation that the outcome of the two-day meeting was not a unanimous decision. In terms of economic data, the latest PMI manufacturing data showed positive growth five times as much as initial forecasts for December, which will provide optimism that the economy is recovering from the fourth quarter slump.
Factory output increased 1% from the previous month, despite initial estimates of a 0.2% rise, while a separate report showed that the UK trade deficit narrowed by more than half to £1.11 billion, the lowest level since April 2003. The reports combined point to an improving economy and the end of the year when the economy contracted 0.2%.
The Pound declined against the U.S Dollar and the Euro towards the close of trading, as a report from the National Institute for Social and Economic Research released a report, which showed that the UK economy contracted in the three months to January, supporting the case for the Bank of England to continue monetary easing.
Euro / US Dollar exchange rates
The Euro was unable to break resistance in the region of 1.33 against the Dollar, ahead of the key events yesterday and drifted weaker, as funds looked to trigger stop orders below 1.3250. As well as caution ahead of the ECB meeting, there was also substantial tension surrounding Greek negotiations. The Central Bank left rates on hold at 1% and in the press conference, the chairman Draghi refused to comment on the issue of Greek bonds.
Ahead of the Euro-group meeting in Brussels, the Greek government stated that it would accept the conditions for a €130 billion second loan package to prevent a debt default. The government will still need to find an extra €350 billion in savings to meet the criteria for a bailout and will also need a parliamentary approval for the measures.
Two coalition party members resigned immediately following the deal and there will inevitably be hostile reactions within Greece. This level of uncertainty prevented the Euro from gaining much traction and it again failed to hold above the 1.33 level. In the U.S, the jobless claims data was better-than-expected, reflecting the recent positive outlook of the labour market.
Today’s Exchange Rate Data
U.K 09:30 – Producer Price Index (January) – Output
U.S 13:30 – International Trade Balance (December)
U.S 14:55 – Prelim Michigan Sentiment (February)
U.S 19:00 – Federal Budget (January)
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