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Both the European Central Bank and the Bank of England announced asset purchases today, but the Euro skyrocketed while the British pound fell, leading many currency traders to wonder What Sets the ECB Apart from Fed and BoE? Read Boris’ take on the Bank of England Rate Decision Before talking about why the euro recovered, here are the 4 key announcements made by the ECB today: 1. Cut Repo Rate from 1.25 to 1.00% There is no question that these are unprecedented measures for the European Central Bank. Everyone expected the quarter point rate cut to a record low of 1.00 percent, the decision to increase the maturity of refinancings to 12 months and also the narrowing of the rate corridor by 50bp, but the chance of purchasing euro-denominated covered bonds was low. Nonetheless, Trichet has resorted to what many consider Quantitative Easing (even though he explicitly denied that this is QE) and rather than punishing the euro, currency traders are applauding the ECB for being flexible and realizing that there is no longer a stigma attached to asset purchases. Also, the amount of bonds that the ECB is purchasing is nominal compared to the rest of the central banks. The ECB plans on buying up to EU60 billion, which is less than half of the BoE’s Quantitative Easing program. More importantly however, Trichet suggested that they may sterilize the liquidity impact of bond purchases, which would limit the impact on the money supply and the pressure on the euro. The Fed and the BoE’s purchases are unsterilized. Finally, this is only an initial announcement. Further details on the bond plan will be released in June. Although rates are appropriate for the current time, the central bank could still take interest rates below 1 percent based upon Trichet’s comment that they have decided if rates have hit their lowest point article from kathylien
According to the RICS House price balance, new buyer inquiries were the strongest in 10 years. Housing market turnover was still low, but that may soon improve as well. The BRC retail sales monitor also jumped 4.6 percent. As a leading indicator for the broader retail sales index, the data suggests that consumer spending improved materially in the month April. The early release of the employment numbers helps to explain why consumer spending has picked up. Although the unemployment rate hit a 10 year high, the number of people claiming unemployment benefits has decreased significantly while earnings saw a smaller than expected decline. The Bank of England will be delivering its Quarterly Inflation report tomorrow. A more negative tone is expected given the comments made following the last monetary policy decision. This should lead to a correction in the GBP/USD, but that should be looked as an opportunity to add to long positions. I expect any retracement in the GBP/USD to be limited to 1.51 and I am still looking for a move to 1.55.
article from kathylien |
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