The forex market has been dominated today by the actions of the European Central Bank (ECB).
By Peter Martin
Friday, June 6, 2014
At its monthly monetary policy meeting, the ECB decided to wade into the unchartered waters of charging fees on deposits, lowering its deposit rate, previously at zero, by 10 basis points to -0.1%, dipping into negative territory for the first time. 10 basis points were also slashed from the ECB’s benchmark refi rate, taking it down to a record low of 0.15%. This cut was not quite as far as most were expecting, though, with the consensus estimate ahead of the decision pointing to a 15 basis-point cut.
Despite not being quite as aggressive as forecast, the reduction in the rate, along with word that further action would be announced at ECB President Mario Draghi’s follow-up press conference was enough to push the euro down to a four-month low of 1.3503 against the dollar in the direct aftermath of the decision.
Mr Draghi did duly introduce a number of additional stimulus measures aimed at combatting the low inflation that has been plaguing the eurozone recently, saying, ‘We decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy’. Though this additional action (which includes targeted, longer-term refinancing operations, ‘preparatory work’ for Fed-style purchases of asset-backed securities and suspension of operations to sterilize the liquidity injected under the Securities Market Program) will inject a significant amount of extra liquidity into the financial markets, the measures in the final analysis are not as aggressive as they might have been and fall short of out-and-out quantitative easing.
Judging by the price action of EUR/USD, the market was expecting something even punchier, and by early afternoon in New York, the forex pair had rebounded from its lows all the way into positive territory for the day, trading at 1.3634, a gain of 0.26% on the day. The possibility of full-blown QE remains, though, with Mr Draghi revealing that the decision by the ECB’s governing council was unanimous and hinting that more could follow. ‘Are we finished? No,’ he said.
Though it was the biggest talking point of the day, the ECB wasn’t the only central bank in action, with the Bank of England also announcing its latest monetary policy decision. The decision there was for no change, which was widely expected, but the quandary facing the Bank of England is the opposite to that of the ECB, with inflationary pressures coming from UK housing and the economy performing strongly this year, meaning discussions about UK interest rates are no so much about if the next move is higher, but when it will happen. Expectations of policy being tightened by the Bank of England are lifting the pound higher, and today GBP/USD climbed 0.40% to 1.6803.
Away from the forex markets, the US stock market has pushed higher to set new record levels ahead of tomorrow’s crucial release of government figures for employment in May. Data released today shows initial jobless claims edged higher last week, climbing 8000 to 312,000. Though this is not a good result, the overall trend still suggests improvement, with the four-week moving average easing to 310,250 from 312,500 in the week prior, a post-recession low and some 10,000 better than it was looking a month ago. This means there are reasons to remain optimistic about tomorrow’s non-farm payrolls and this is likely contributing to the buoyancy on Wall Street.
In early afternoon trading on Wall Street, the Dow Jones Industrial Average was up 0.55% or 92 points at 16,829, while the S&P 500 index climbed the same percentage to reach 1938.6. Both indices set new all-time intraday highs earlier in the trading session.
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