Currency Update – Thursday

Currency Update – Thursday

The Dollar's strong rally paused yesterday, as some traders took profits on the previous move upwards, while others squared their positions before today's rate decision by the BoE and the ECB, and ahead of tomorrows non-farm payrolls. The Pound has managed to claw back some of yesterday's losses to sit above 1.78 against the USD, after previously falling to below 1.77. Part of the Pounds, very limited, recovery was due to a surprise improvement in the Purchase Managers Index for services, which was expected to fall further but actually rose to 49.2, although this is still at a level showing contraction in the sector.

The PMI index didn't help the Pound against the Euro however, and even further confirmation that Eurozone GDP actually fell in the 2nd Quarter, final revision left growth at -0.2%, still couldn't stop the Pound ticking lower against the Euro, holding down below 1.23, and almost hitting 1.22 overnight, although it has recovered slightly. The strength of the Euro seems overdone when the weakness in the economy is greater than the ECB predicted, and any signs that this is the case from the ECB this afternoon, could take away some of the Euro's strength.

The two rate decisions will dominate the markets thinking today, but there are a few other releases also, one of which is the HBoS house price index which has shown prices in the UK falling by 10.9% over the year. The expectations were for a 10.7% drop so the figures are unlikely to shake anyone's view, and have left Sterling unaffected ahead of the decisions.

In a Reuters poll 56 out of 56 economists thought that the BoE will keep rates on hold, and unless the MPC take the very unusual step of also releasing a statement along with their decision, we won't actually get any insight into their thinking until the minutes are released in two weeks time. As usual the ECB decision and their post match press conference will provide much more for the markets to get their teeth into. Like the MPC, the ECB are expected to keep rates on hold, however it is what is said by Trichet in the post decision press conference which will be of interest for the markets. If Trichet comments upon the Eurozone's slowdown and acknowledges it is more rapid than he expected then this could be seen as a softening of the ECB's previous hawkishness and the Euro may weaken as a result.

Michael Corcoran | Treasury Solutions | nabCapital

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