Despite the fact that Friday we will witness the US
employment report, today is undoubtedly the most important day of the
week and will likely shape the dynamic for EUR and GBP (in addition to
UK and eurozone assets) over the coming weeks. The focal points
obviously being the interest rate meeting decisions from the Bank of
England and the ECB.
In the UK speculation will be on the initiation of a further tranche of quantitative easing.
Having seen a significant swing in the MPC last month towards the dovish end of the recent spectrum I still think that it is a little early for the MPC to embark on the next stage of QE. It is true the economic backdrop has deteriorated further yet the most recent activity surveys in both manufacturing and service sectors in the UK showed a modest improvement back into moderate expansion. Confidence data, and admittedly the consumer activity (as indicated in the Q2 GDP revision yesterday), has remained weak. But the predominant driver of global confidence remains at the hands of European policy makers and the implications for global confidence.
As I see it, expanding the money supply in the UK may be successful in pushing interest rates lower, but this impact will be minimal when you consider where they are already. Gilt yields are already trading around historic lows and whilst I understand the desire to give confidence a boost, QE (which is largely already priced in by the market) at this stage may be a waste of bullets – at least until there is a resolution to the eurozone crisis, of some form. Back revisions to the economic growth data by the ONS released yesterday showed that the peak to trough drop in UK output was 7.1% rather than 6.4%, but there were upward revisions to 2009 and 2010. Ultimately there is little in the data to impact on the current policy debate, as I see things.
In the eurozone the question mark will be on whether Trichet, in his final meeting as head of the ECB, sanctions an interest rate cut. Whilst the economists are estimating no change in rates, the interest rate market has priced in around a 50% probability of a 25bp cut in the benchmark rate. Whilst I view a rate cut from the ECB as unlikely, a raft of further measures including a 1 year LTRO, a revival of covered bond buying and or further liquidity provision commitments are distinctly possible as the much more is still needed from Europe in terms of supporting, liquidity, European banks and, ultimately, global confidence.
Whatever the outcome of the two seminal meetings today, there is likely to be a sharp pick up in volatility as the market repositions. With the US employment report tomorrow and a US market holiday on Monday, liquidity will likely be reduced, which will likely add further to the volatility.
Elsewhere, EURCHF has traded above its 200 day moving average this morning for the first time in around 2 years, and with bounce being supported by official suggestion (not action at this stage) that the ‘peg’ may be moved up to 1.3000 or even 1.4000 in due course.
The other news of note overnight was the proposition of a second Homeland Investment Act in the US, or effective tax amnesty for USD repatriation. Whilst the announcement gave a short-lived bid to the USD, the likelihood of passing the bill is very remote in my view as the figures from the first act (2004) suggested that the 5.25% amnesty rate, reduced the effective tax intake over the following 10 years by around USD80 billion – not something that would be seen as prudent in the current fiscal deficit reduction debate.
In the UK speculation will be on the initiation of a further tranche of quantitative easing.
Having seen a significant swing in the MPC last month towards the dovish end of the recent spectrum I still think that it is a little early for the MPC to embark on the next stage of QE. It is true the economic backdrop has deteriorated further yet the most recent activity surveys in both manufacturing and service sectors in the UK showed a modest improvement back into moderate expansion. Confidence data, and admittedly the consumer activity (as indicated in the Q2 GDP revision yesterday), has remained weak. But the predominant driver of global confidence remains at the hands of European policy makers and the implications for global confidence.
As I see it, expanding the money supply in the UK may be successful in pushing interest rates lower, but this impact will be minimal when you consider where they are already. Gilt yields are already trading around historic lows and whilst I understand the desire to give confidence a boost, QE (which is largely already priced in by the market) at this stage may be a waste of bullets – at least until there is a resolution to the eurozone crisis, of some form. Back revisions to the economic growth data by the ONS released yesterday showed that the peak to trough drop in UK output was 7.1% rather than 6.4%, but there were upward revisions to 2009 and 2010. Ultimately there is little in the data to impact on the current policy debate, as I see things.
In the eurozone the question mark will be on whether Trichet, in his final meeting as head of the ECB, sanctions an interest rate cut. Whilst the economists are estimating no change in rates, the interest rate market has priced in around a 50% probability of a 25bp cut in the benchmark rate. Whilst I view a rate cut from the ECB as unlikely, a raft of further measures including a 1 year LTRO, a revival of covered bond buying and or further liquidity provision commitments are distinctly possible as the much more is still needed from Europe in terms of supporting, liquidity, European banks and, ultimately, global confidence.
Whatever the outcome of the two seminal meetings today, there is likely to be a sharp pick up in volatility as the market repositions. With the US employment report tomorrow and a US market holiday on Monday, liquidity will likely be reduced, which will likely add further to the volatility.
Elsewhere, EURCHF has traded above its 200 day moving average this morning for the first time in around 2 years, and with bounce being supported by official suggestion (not action at this stage) that the ‘peg’ may be moved up to 1.3000 or even 1.4000 in due course.
The other news of note overnight was the proposition of a second Homeland Investment Act in the US, or effective tax amnesty for USD repatriation. Whilst the announcement gave a short-lived bid to the USD, the likelihood of passing the bill is very remote in my view as the figures from the first act (2004) suggested that the 5.25% amnesty rate, reduced the effective tax intake over the following 10 years by around USD80 billion – not something that would be seen as prudent in the current fiscal deficit reduction debate.
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