Currency Update – Friday 6th March

Currency Update – Friday 6th March

So both European banks delivered almost exactly want the markets expected, both cut by 50bp, UK rates are now at 0.5%, while Eurozone rates are at 1.5%. Also as expected the BoE announced quantitative easing measures, they plan to buy up to GBP75bn worth of government securities over the next three months, and have the authority to inject up to GBP150bn into the system. Whether this amount will be enough to actually encourage the banks to lend money rather than hoard it, is uncertain. The government do have written agreements with the part nationalised banks, but it's hard to see what sanctions they could impose to make sure the banks do pass the funds on. The move does also raise concerns over long running inflation, but the MPC are much more concerned with medium term risks to deflation, and the markets seem to agree with Sterling staying steady after the decision, holding around 1.1250 against the Euro.

The Pound was steady against the Euro as even though the rate was reduced as expected, the ECB press conference also hinted that the rate cut was not the last and that more were to come. Eurozone rates are still relatively high at 1.5%, compared to 0.5% in the UK, and near 0% rates in the US and Japan, but the Eurozone economy isn't showing the increased strength to justify the difference, and inflation is still underneath their target and likely to come down further. One of the council members said they would only consider quantitative easing if deflation became a serious risk. The Euro initially dropped against the Dollar falling down below 1.25.

We may have had the rate decisions in Europe to occupy our minds, but in America it was the stock markets and yet more pessimism that dominated thought. A review of General Motors concluded that their business model was not viable and needed to be fundamentally changed if the company is to survive, and Citigroup's shares dipped under $1 for the first time, the bank was previously the worlds biggest bank, it's now the 184th biggest bank by market capitalisation. The markets are likely to stay jittery before what is likely to be more depressing news from the non-farm payrolls report this afternoon, and this has allowed the Euro to recover back to 1.27, while Sterling has climbed back above 1.42 against the Dollar.

The big event of the day is the US non-farm payrolls, fourth consecutive fall of over half a million is expected, but it could be an even larger fall with Wednesday's ADP report showing some disastrous numbers. The market was largely under whelmed by Obama's stimulus plan, and if the report shows more than expected job losses, after Obama himself said his plan would create/protect 3 million jobs, then the markets are likely to view the future with a mild hint of panic.

Before this afternoon's events we've already had the Producer Price Index for the UK, which was expected to rise by 0.1% on the month, but actually rose by more, much more. Prices rose by 0.6% over the month, partly caused by a rise in the price of oil, not helped by the lower Pound keeping import prices high. With rates pretty much hitting a trough at the moment, and likely to stay their for some time, the data isn't going to affect the future of rates, or the currency markets.

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