Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 1st of August.
While the worlds awaits the outcome of the Federal Reserve FOMC meeting today evening and the ECB’s monetary policy meeting tomorrow, the recent statements by Austrian central bank president Ewald Nowotny and ECB president Mario Draghi has reopened an old debate: the desirable limits of ECB policies.
While Nowotny announced that the European Stability Mechanism should be given a banking license to allow it to borrow from the ECB and buy peripheral bonds thereafter, Draghi pledged to do “whatever it takes” to save the euro. Draghi’s statement is in sync with his predecessor Jean-Claude Trichet, who initiated peripheral bonds purchase through the Securities Market Program. Understandably, the markets interpreted Draghi’s statement as a precursor to another round of assets purchase, only much bigger in size than the €200 billion spent earlier. The question is: does this measure provide a lasting solution?
Buying bonds of Spain, Italy and other high-yield countries will incentivise these countries to defer the politically difficult decision of reducing long-term fiscal deficits. While Italy needs to trim its public sector, Spain must focus on containing the deficits of its regional governments. When ECB brings down long-term borrowing costs artificially, it’s difficult for people to know if deficit reduction targets have been achieved. The peripheral countries went to the brink because bond markets treated all the 17 members equal, failing to differentiate between two-speed economies. Now that the error has been rectified, ECB’s intervention will ensure the mistake is repeated.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2714
GBP/US$ – 1.5668
GBP/CHF – 1.5286
GBP/CAN$ – 1.5705
GBP/AUS$ – 1.4902
GBP/ZAR – 12.9045
GBP/JPY – 122.61
GBP/HKD – 12.1618
GBP/NZD – 1.9283
GBP/SEK – 10.5877
EUR: Strong month-end demand from traders for squaring off positions ahead of the US Fed and ECB monetary policy meetings pushed both the cable and the USD down against the single currency yesterday. The euro gained despite a rise in Spanish and Italian bond yields and an unexpected fall in German retail sales number. However, some of the shine was taken off the euro later as German officials reiterated their opposition to the much-speculated bond buying program by the ECB. While the US Fed’s FOMC meeting may increase the volatility of the EUR/USD pair later today, the euro is more likely to trade on headlines ahead of ECB’s policy meeting tomorrow. The GBP/EUR pair opens 1.2725 this morning.
USD: The greenback turned choppy against the cable yesterday ahead of today’s FOMC meeting by the Federal Reserve. The GBP/USD pair dropped to 1.5624 before tacking back some ground to close above the 1.5700 level. Analysts’ attributed the poor performance of cable to Moody’s reaffirmation of negative outlook to UK’s AAA credit rating and weak consumer confidence reading released during the day. July UK PMI number is due today while ADP employment number and US manufacturing ISM data will be the main attraction ahead of the FOMC meeting from the other side of the pond. The dollar may weaken Bernanke gives firmer indication of another round of assets purchase. The GBP/USD pair opens at 1.5686 this morning.
Have a great day!
