Looser but how loose? Central banks in focus finally

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This week’s FX markets have been a bit of a snorefest with everybody sat on their hands and waiting for the Bank of England and the European Central Bank to announce their latest monetary policy decisions. Risk did sell off slightly in yesterday’s thinly traded Independence Day markets with the dollar about a cent stronger against the pound and the euro and this simply means that we are back towards the prices we were seeing at the beginning of the week.

The Bank of England’s decision, since the minutes of the previous meeting became public, has become a matter of not if further QE is needed but how much. The voting record last month was 5-4 in favour of holding policy with the Governor Mervyn King one of the members voting for additional stimulus. Since then, the news from the UK and global economies have both worsened and it has become a debate over the amount.

We think the larger number of £75bn is appropriate; spread over the remaining months between now and the November Inflation Report which will act as a useful roadmap for progress. This combined with the latest “funding for lending” plan could be a useful 1-2 punch for the UK economy but it is the European economy we still remain the most worried about.

Predicting the ECB has become a real difficulty in the past few months with the decisions becoming increasingly hard to fathom. Normal form for the people in Frankfurt is to first worry about inflation, then worry about inflation and finally worry some more about inflation. This policy provoked two of the most disastrous rate rises in recent central bank history and these were swiftly axed once growth slowed dramatically. Growth is now the issue and the markets are expecting a cut to a record low of at least 0.75% by Mario Draghi. The following press conference will outline whether this move will have been unanimous (we doubt it) and whether other measures were discussed (we hope so).

No cut by the ECB would see massive euro weakness as the market would punish the euro for having central banker who resemble the common ostrich with their heads in the sand. 25bps would likely see a small dip and rally and 50bps similar but to a larger extreme.

We also have jobs and services data before the Non-Farm Payrolls number from the US tomorrow. With the focus on looser monetary policy it is more clear than normal that a poor jobs figure today or, more importantly, tomorrow will result in USD weakness as traders price in expectations of further QE stateside.

Good luck

Summer months are typically quiet but with everything rocking from Italy to Spain via the US and UK there is little belief 2012 will follow in the same vein. As we move into the 2nd half of the year we will outline our beliefs of where the pain and pleasure will be found in the next 6 months while taking you through the latest measures designed to help the world economy.

Join us for this Thursday’s run down with World First’s award winning Chief Economist Jeremy Cook also deciphers the impact of the morning’s Bank of England and ECB announcements.

Indicative Rates Sell Buy
GBPEUR 1.2438 1.2465
GBPUSD 1.5583 1.5606
EURUSD 1.2450 1.2465
GBPJPY 124.00 124.27
GBPAUD 1.5172 1.5202
GBPNZD 1.9406 1.9435
GBPCAD 1.5785 1.5814
NZDUSD 0.8020 0.8040
GBPZAR 12.67 12.72
USDZAR 8.1319 8.1623
GBPPLN 5.2417 5.2693
EURJPY 99.52 99.78

Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered. Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.

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Looser but how loose? Central banks in focus finally

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