BoE Holds, ECB Cuts Rate

Along expected lines, the BoE kept its interest rate and asset purchase facility unchanged at current levels and offered no hints over the timeline for future rate hikes. In contrast, the ECB surprisingly announced a series of changes to its policy where it lowered the key interest rate and indicated plans for further asset purchases in order to combat low inflation and boost recovery. As a result, Sterling gained substantial ground against the Euro yesterday. Across the Atlantic, today’s non-farm payrolls report is expected to show more than 200k jobs additions for August, thereby strengthening prospects of continued recovery in the sector. Additionally, peace talks between Ukraine and Russia later today will keep market participants interested.

Pound Sterling – UK Markets

The Pound rose against the Euro yesterday after the ECB surprisingly announced a rate cut and plans for further stimulus measures in an attempt to arrest inflation from derailing the weak economy. However, Sterling continued to suffer losses against the US Dollar and moved close to the 1.63 mark yesterday. The BoE, in its monetary policy meeting, held its key interest rate at 0.5% and maintained its asset purchase facility steady at £375 billion, in line with market expectations. Though the central bank adopted a wait and watch approach, data released earlier this week indicated that services and construction activity in the UK rose unexpectedly, which has strengthened the case for a sooner than expected rate hike in the nation. However, with the BoE unwilling to offer any hints about its future policy stance, market attention has now shifted to the minutes of yesterday’s meeting, which will released later this month, for further direction. Data just out indicated that consumer price inflation expectations for the next 12 months in the UK rose during the third quarter. Meanwhile, investors will keep a close eye on the US official labour market report.

US Dollar – US Markets

The greenback gained ground against the Euro and the Euro-USD pair fell below the 1.30 mark yesterday. The fall was triggered by the ECB’s unexpected decision to lower the key interest rate to 0.05% which was accompanied by a decision to initiate an asset purchase programme as deflationary threat tightened its grip over the Euro zone. Additionally, gains in the greenback were supported after this week’s upbeat ISM reports which indicated that the pace of manufacturing and services sector activity in the US improved unexpectedly for August. The data has raised hopes among investors that the domestic activity is gaining steam which would support jobs growth in the future. Moreover, today’s much awaited US non-farm payrolls data for August will be closely eyed to verify if the number of job additions remains above the 200k mark for a sixth straight month, especially after yesterday’s weak ADP employment report. Additionally, the official labour market report is expected to show a drop in the US unemployment rate for August. Any upside surprise in today’s numbers would further bolster speculation of a sooner than expected hike in interest rates.

Euro – European Markets

The ECB decided to cut its key interest rate to a record low level yesterday and indicated that the central bank will resort to an asset purchase programme which took markets by surprise. This was another round of unconventional measures introduced in the Euro zone within a span of six months, highlighting pressure on the ECB to tackle deflationary threat in the region. Moreover, the ECB downgraded its GDP and inflation projections for 2014. The rate decision, along with a trimmed 2014 forecast, triggered a sharp drop in the Euro against the majors. Additionally, prospects of a ceasefire between Russia and Ukraine were dented after the Russian Foreign Minister warned that if Ukraine becomes a member of the NATO, then peace talks between the two nations can no longer be held. Data released earlier today showed that growth in German industrial production was robust for July. However, this failed to provide any support to the Euro as investors continued to mull over yesterday’s unprecedented measures from the ECB. Meanwhile, today’s revised Euro zone GDP reading is expected to confirm a flat sequential growth.

Other Currencies – Highlights

The Japanese Yen lost ground against the greenback in yesterday’s trading session. However, the Bank of Japan Governor, Haruhiko Kuroda, stated that such weakness in the Japanese Yen was good for the economy as it would additionally support the nation’s exports. The BoJ Chief also seemed confident that the nation would reach the 2% inflation target by the next fiscal year and urged the government to go ahead with the next sales tax hike. Additionally, the monthly economic survey released by the BoJ earlier today reiterated that domestic consumption is showing signs of resilience and company profits are improving. With the much awaited US labour market report scheduled later today, the Japanese Yen is likely to witness volatility against the greenback. Additionally, next week’s crucial domestic economic releases including the minutes of the last policy meeting and the final GDP reading for the second quarter will provide further direction to the Japanese Yen against the majors.