ECB Contemplates Negative Deposit Rates

With yesterday’s BoE and FOMC minutes pointing towards a slight shift in stance by the respective central banks, it remains to be seen when the BoE will hike its benchmark interest rates and the Fed will begin to taper its massive bond buying programme. Meanwhile, reports emerged that the ECB is contemplating negative deposit rates, if required, to support the economy. In the midst of all the central bank chatter, economic data continues to paint a bleak picture of the global economy, with yesterday’s largely downbeat US releases and the just out dismal Euro zone manufacturing and services PMIs leading the way. Another set of important US macro releases today will offer further hints on the US economic recovery.

Pound Sterling – UK Markets

After climbing to a near three-week high in early trade, the Pound nudged lower against the US Dollar following the release of surprisingly hawkish FOMC meeting minutes. However, Sterling managed to hold on to its gains against the Euro. Meanwhile, yesterday’s BoE minutes somewhat dampened expectations of a swift rate hike in the UK as MPC policymakers expressed uncertainty about the sustainability of the nation’s economic recovery. Policymakers indicated that medium term inflation expectations remain subdued and clarified that the unemployment rate falling to 7% in the future would not lead to an automatic tightening of monetary policy. Echoing similar views, MPC board member, Martin Weale, opined that since the introduction of forward guidance, there has been a noticeable albeit insignificant rise in inflation expectations in the UK. Meanwhile, the Pound is trading in a tight range against the majors this morning after the Public finances report showed that the British government’s borrowings grew at a slower pace last month. Apart from the domestic CBI industrial trends survey, a string of US economic data will determine trading sentiment in the Pound-US Dollar in the session ahead.

US Dollar – US Markets

The unexpectedly hawkish FOMC meeting minutes lifted the US Dollar sharply against its counterparts yesterday. The minutes revealed that the central bank is closer to reducing QE “in coming months” as the labour market and the economy improves. FOMC policymakers are also deliberating on ways to trim the asset purchases without triggering a spike in interest rates. The St. Louis Fed President, James Bullard, also sounded optimistic after he opined that a strong November jobs report will increase chances of a December taper. Meanwhile, the Fed minutes completely overshadowed the mixed bag of US economic data released earlier yesterday. While a jump in retail sales pointed towards increased consumer demand, consumer price inflation dropped to a four-year low for October. Also, the weak existing home sales print indicated the consequences of rising mortgage rates and home prices. Meanwhile, the greenback has nudged marginally lower against the majors this morning ahead of the labour market and manufacturing PMI reports later today. A positive print on both fronts will further strengthen the US Dollar against its peers.

Euro – European Markets

The common currency weakened against its peers yesterday after a report indicated that the ECB is looking to resort to negative deposit rates to help spur the economy into motion. With the Euro zone economy faltering by the day, such a move in the near future remains completely in the realms of possibility. In this context, the ECB President, Mario Draghi’s speech later today will be closely followed for further insights about the same. The downfall in the Euro continued after the minutes of the FOMC meeting indicated that the US central bank is closer to reducing its bond purchases. Meanwhile, the single currency has moved higher against the majors in today’s trading session after the just out manufacturing and services PMI reports showed a pickup in activity in Germany, although the overall Euro zone and French prints came in surprisingly downbeat. Later today, the Euro zone consumer confidence data and a raft of important US macro releases will be eyed by investors for further direction.

Other Currencies – Highlights

The Japanese Yen has continued its downward momentum against its counterparts this morning after the Bank of Japan, as expected, kept its benchmark interest rate at 0.10% and also pledged to maintain the pace of bond purchases in its monetary policy meeting earlier today. However, the central bank maintained that the domestic economy continues to recover moderately, although the global outlook remains uncertain. The Yen’s slide against the greenback had begun yesterday after the minutes of the latest Fed meeting showed that QE3 tapering could begin in the next few months. With no further domestic economic data on tap today, investors will keep a tab on news flows emanating from both sides of the Atlantic for further direction to risk appetite. Furthermore, the Bank of Japan’s monthly economic survey report tomorrow will prove crucial for the Yen against the majors going forward.