Eyes on MPC, ECB
Pound Sterling - UK Markets
The Pound has strengthened this morning against its major currency partners, trading at 1.41 against the Dollar and 1.12 against the Euro. The Pound is also up against the safe haven Yen and Swiss Franc as investors gain limited appetite for risk in the run up to the Bank of England interest rate decision.
The MPC is widely expected to reduce the base interest rate to 0.5% and this is priced into the value of Sterling this morning. Having exhausted the interest rate option, the Bank is now expected to introduce quantitative easing to increase the supply of money to the UK economy. Job cuts and deepening recession are threatening to drag inflation below the Bank's 2% target and the Bank is looking for more unconventional methods of increasing money supply. Quantitative easing will see the Bank buy millions of Pounds worth of assets from ailing banks in the hope that this will stimulate the flow of credit. PM Brown addressed the US Congress yesterday urging the world's largest economy to lead the way out of the credit crisis. Brown called for an end to economic protectionism, a greening of new industry and an end to offshore tax havens. This was met with widespread Democratic support. House prices have declined another -2.3% in February and the Bank of England decision is due at noon.
US Dollar - US Markets
The Dollar remains strong this morning, gaining on the Euro and holding steady at 0.70 versus the Pound. The Euro and Pound exchange rates are capped by interest rate decisions later in the day and weak employment figures have dampened positive sentiment in the US.
The US economy shed 697,000 private sector jobs in the month of February and the Fed's Beige Book showed further economic deterioration in the first two months of 2009. This news came accompanied by a warning from Timothy Geithner who stated the US slump is deepening with little hope of recovery in the near future. Geithner and Bernanke, the primary spokesmen for the Federal Reserve, have argued stimulation of bank loans is crucial to recovery and neither will rule out further cash injections which remain critical to the health of some financial institutions. US banks continue to be battered by both market shocks and deepening recession which has effectively frozen consumer and interbank lending. It is looking increasingly likely the US government will have to add to the $787 billion rescue package already approved. Moody's has recently warned JP Morgan, Wells Fargo and Bank of America may have their credit ratings downgraded as a result of the recession. Tomorrow sees a variety of important data out in the US, from average earnings to the unemployment rate.
Euro - European Markets
The Euro is broadly weaker this morning, down against the traditional safe havens as markets view the ECB as behind the curve when it comes to fiscal policy. The Euro has gained on the higher yielding Australian and New Zealand Dollars and is likely to remain subject to volatility in the lead up to the ECB decision.
A rate reduction of 0.5% is widely expected today from the ECB. However the Bank is facing mounting criticism that it has been slow and ill-equipped to deal with financial crisis in the Eurozone. GDP and business confidence in European nations has plunged at record rates and thus far the ECB has been reluctant to take decisive policy action. This has put the ECB at odds with central banks around the world although their policy response has been inhibited by the diversity of the Eurozone's constituents. German retail sales have declined -0.6% for the month of January, taking annual rates to -1.3% on the year. EMU GDP figures are due this morning to be followed by the ECB interest rate decision and a speech from ECB President Trichet.
Other Currencies - Highlights
Chinese Premier Wen Jiabao has announced a $585 billion stimulus package for China amid the most difficult economic year China has had this century. The Premier also declared annual growth targets of 8% and the communist party is reported to fear social instability if the economic situation continues to deteriorate. This degree of support bolstered Asian equities and the Australian Dollar received a boost from renewed optimism over the Chinese economy.