As several policy meetings take place this week, markets continue to be dominated by speculation over which moves will be taken by various nations in terms of stimulus measures and interest rates, with potential volatility towards the end of this week.
The Federal Governor’s speech yesterday heightened speculation that the US are increasingly likely to end up using more quantitative easing. The Bank of Japan has set a benchmark by yesterday choosing to extend their asset purchases and lowering interest rates. Speculation over whether the UK also requires further stimulus measures to shore up the economy is maintaining pressure on the Pound.
Pound Sterling – UK Markets
Some positive PMI construction data yesterday gave the weak Pound something of a boost with some ground being won back by Sterling over the Euro. So far today however has seen another fall in the Pound against the single currency with the general state of play resuming.
Today’s PMI services data for September has also shown growth over the pervious month although currency movements continue to be dominated by larger policy decisions this week, with the Bank of England rate decision on Thursday.
Economic policy and budget cutting measures continue to be under scrutiny. Plans by the FSA to introduce detailed mortgage regulation has been criticised by the Council of Mortgage Lenders (CML). Whilst the FSA wants to prevent the excessive mortgage lending that characterised the run up to the economic crisis, the CML is concerned that the planned regulations will cause good mortgages to be non-granted with the planned rules being too restrictive.
City bonuses have also been in the headlines with bonuses expected to total about £7 billion, not far from levels pre-crisis. However, the new 50 percent tax rate on higher incomes means that a large amount will be going straight to the treasury.
US Dollar – US Markets
The US Dollar has suffered a steep drop so far today against the Euro and the Pound, after making some small gains back on the Euro late yesterday.
There was some mixed data yesterday. Although factory orders for August were down 0.5 percent, pending home sales were up above forecasts. September ISM non manufacturing data is due today which shows business conditions in the US non-manufacturing sector and is expected to show a slight improvement.
Speculation over stimulus measures however has continued to be the dominant factor following the speech by the Federal Governor. Bernanke’s comments suggested that the US is paving the way for further asset purchases although he did not go into specific details on numbers and amounts.
Euro – European Markets
European PMI data has improved on forecasts today whilst month on month retail sales have dropped by – 0.4 percent.
The state of Ireland’s economy refuses to move off the agenda as property website operator MyHome commented on reports that house prices continued to decline in the third quarter. MyHome have suggested that Ireland’s house market slump has yet to trough in the wake of the recession with prices dropping 3.9 percent in the three months through to September from the second quarter. The Irish Central Bank commented yesterday that the lack of demand for property has curbed construction which will continue to drag on economic growth.
For now, the Euro is maintaining its strength. European GDP figures tomorrow and the ECB interest rate decision on Thursday as well as what happens at the policy meetings of other nations are the most likely factors to influence this.
Other Currencies – Highlights
Both the Bank of Japan and Reserve Bank of Australia have surprised markets with their policy moves and interest rate decisions.
The Reserve Bank of Australia decided, against expectations, to keep interest rates on hold at 4.5 percent rather than raising them by another 0.25 percent sending the Australian Dollar spinning lower. The decision seems to have been made in response to some signs from the various data reports that the economy may be slipping back with policy makers therefore erring on the side of caution.
The Bank of Japan on the other hand, pledged to keep its benchmark interest rate at ‘virtually zero’, cutting the rate down to a level of 0 percent to 0.1 percent, the lowest since 2006. Asset purchases will also be stepped up by the creation of a 5 trillion Yen (60 billion US Dollar) fund to buy Government bonds and other assets. The Yen fell the most in almost three weeks against fourteen of its sixteen major counterpart currencies, as a result of these moves, which is what the nation needs to ensure its export-led recovery will remain in tact.
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