Currency Update – Friday 16th January

Currency Update – Friday 16th January

If the ECB are fighting to catch up on the rate cutting trend then they are not trying very hard, although they did cut Eurozone interest rates by the 50bp that the markets expected, the statements that accompanied the cut were less dovish than many had hoped. Trichet described the risks to 'price stability', i.e. inflation, as broadly balanced while risks to growth were seen as being on the downside. Trichet also indicated that they would re-assess the rate levels in March, which seem to indicate that February's meeting, which is only roughly three weeks away, would result in a no change decision. With the view that price stability is balanced, but risks to growth are on the downside, coupled with the fact that the ECB are targeted on meeting price stability objectives, it seems that the ECB, and the associated governments,  are more likely to look at other measures to help stimulate growth, and that rates may not have much further to fall.

The markets didn't quite know what to make of the decision at first, although they got the cut they expected, it looks like rates aren't going down much further. The Euro initially strengthened, however once the markets got a chance to mull over the decision, and contrast it to the extremely soft data coming out of the Eurozone economy, the Euro has weakened and overnight Sterling has managed to climb above 1.1250 against the single currency.

The Euro did initially fall against the Dollar, below 1.31, but the Dollar has been beset with it's own woes as the credit crunch once again reared it's head with Bank of America getting $20bn from the US government to help cover the losses incurred by absorbing Merryl Lynch. The actual economic data out of America yesterday actually showed some improvement, albeit the surveys released were improving from very low levels, but as the banking sector showed further weakness the Dollar fell, allowing Sterling to climb above 1.4850, and the Euro above 1.32 against the US currency.

It's a light data calendar today, although, as always, events have had their impact on the market with news that Anglo-Irish bank has effectively been nationalised possibly contributing to the Euro's weakness.

The scheduled data calendar is all in the US were we have CPI, Industrial production, and a consumer confidence survey. The CPI is expected to fall, as is industrial production, which will ramp up the fears of deflation and weigh on sentiment, so it looks like the most improved currency of 2009, Sterling, could gain some more ground over the course of the day, although of course it's easier to improve when you start the year near all time lows.

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