Currency Update – Friday

Currency Update – Friday

The Central banks like stability in the markets, so they try to avoid making any surprising moves, and both the MPC, and the ECB, kept to the script yesterday, with rates in the UK and the Eurozone staying on hold. As normally with the MPC, no statement was issued so we don't get any view into their thinking until the minutes are released in a few weeks. With the way the UK economy is crumbling some expect that the MPC will find it hard to ignore calls for a rate cut before Christmas, while others look toward the inflation rate and think it may take a while before the MPC can justify a move downwards. As the no change decision was widely expected the Pound didn't react.

The ECB decision and the immediate press conference held afterwards, did make some waves in the markets. Although the ECB kept their rate on hold, and they acknowledged the sharp slowdown in the Eurozone economy (with negative growth in Q2 how could they not?), they differed from some people view in still viewing upside risks to inflation. Some now expect inflation to have peaked, with the price of oil and commodities dropping, and the economy slowing, but Trichet thought '....that the upside risks to price stability over the medium term prevail.'. The whole tone of the press conference was more hawkish than many expected, however it was the announcement that the ECB would be changing it's special measure introduced last year, to ease liquidity in the money markets, which has caused both the Pound and the Euro to fall.

With the credit crunch hitting the financial sector in the UK particularly hard, the ECB's repricing of it's liquidity measures has hit the Pound; although Sterling has stayed steady against the Euro, sitting around 1.23, it has fallen heavily against the Dollar, which had it's own bullish news with a service sector survey showing the sector surprisingly back into growth, dropping towards 1.76. The Euro has fallen to a 10 month low against the Dollar falling to below 1.43.

The tightening of the belts in the financial industry, as well as continuing bad news from the larger economy, car sales of the new licence plate numbers were down from last year, are likely to continue to weigh on the Pound for some time. With the Euro also under some pressure the rate may not have too much further to fall, however against the Dollar the Pound may prove weaker. Today we get the non-farm payrolls, yesterday ADP employment report is often used, in spite of it's unreliability, as a precursor to today's report, and yesterday came in much weaker than expected, which has prompted speculation that expectations for this afternoons report, which were for a 75k loss, to be even lower. As the sentiment is bullish for the US economy, in spite of the previous expectations of a 75k fall, it would take a drastic fall in the employment figures to dent the Dollar sentiment.

Michael Corcoran | Treasury Solutions | nabCapital

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