Given the recent weakness of both the pound and the euro in recent days it would appear that markets are expecting some form of monetary easing today from both the Bank of England and the European Central Bank, though any ECB measures are more likely to be implied rather than actual.
In the Bank of England’s case the markets do appear to be gearing up for a resumption of the asset purchase scheme given the recent splits amongst policymakers over last month’s decision. This week’s disappointing “funding for lending” numbers would also appear to have given a boost to the doves, which seems a rather odd state of affairs when to date most of the £375bn worth of QE done since 2009, appears to be sitting on banks’ balance sheets.
This fact was pretty much acknowledged by the Bank Governor in November last year in the inflation report when he stated that there was little else he could do to boost the UK’s growth prospects given policy failures around the world to co-ordinate structural changes. He cited concerns about rising inflation as one of his key concerns, and given the pounds precipitous drop since January that will be even more of a concern today.
Mr King has gone to great lengths to extol the benefits of a weaker pound in recent weeks and it would appear that he has achieved that, which in a way rather negates the need to do more easing and for all the good an extra £25bn would do it would probably be simpler to hold off for now given the surprise rebound in services PMI seen in February.
Given the questionable success of QE thus far in boosting the economy doing more now would appear to have all the hallmarks of desperation, and could prompt a sterling rout.
Holding off would also allow more time for the funding for lending program to gain extra traction, and also head off criticism from savers and pension funds unhappy at plunging annuity rates.
While it would only need two more MPC members to come over to the doves way of thinking I would suggest that the Bank could well keep policy unchanged for now, given this week’s strong rebound in some of the retail data, and the pounds fragility on the currency markets.
Over at the European Central Bank there is unlikely to be any change in policy for this month, however as with all things with respect to the ECB it will all be about the nuances of President Draghi’s press conference.
Mr Draghi will in all likelihood continue to point to the stabilisation in financial markets, while keeping policy “accommodative” though he is likely to adjust downward growth forecasts for 2013 and 2014, while at the same time urging governments to stick to their reform programs.
It will be interesting to see if the interest rate decision is unanimous, given recent economic data, because if it isn’t that could well trigger some further weakness.
He will also likely reiterate that the exchange rate is not a policy target, and is only a factor when determining the inflationary outlook.
In the US the latest weekly jobless claims numbers are expected to come in at 354k, up from 344k, while the January trade numbers are expected to show an increase in the deficit to $42.6bn, from the surprisingly narrow $38.5bn deficit seen in December.
EURUSD – the 1.2960/70 level appears to be holding for now and while it does the risk of a pullback towards 1.3125 and the 100 day MA intact, as well as the 1.3160 level, remains a possibility. The H&S objective at 1.2900 still remains in sight and the next target, while the next long term support level remains at 1.2845 and the 200 day MA.
GBPUSD – a late plunge towards the 1.4950 level in late New York has brought the pound back close to its 2010 lows and with it the prospect of an even bigger drop towards the June lows at 1.4350 via 1.4820.
The key level on the upside remains at last week’s high at 1.5220 and this remains the key obstacle to further gains towards 1.5400.
EURGBP – yesterday’s failure to push below 0.8580 keeps the current range intact with resistance at the 0.8680 area. Only a move below 0.8580 has the potential for further weakness towards 0.8460. Having seen a key reversal day last Monday the risk remains for a move lower, while below 0.8680.
USDJPY – currently treading water below the 94.00 area and recent range highs, the risk remains for a move back towards the lows last week. The 92.80 level should act as support while a break lower re-targets the 92.00 area.
The key support remains towards the 90.30 area and it is this area which the US dollar needs to stay above to keep upside intact.