Markets prepare for today’s BoE and ECB announcements

Publication date: 5 July 2012
Author: Richard Driver, CaxtonFX

With the US Independence Day celebrations in full swing yesterday, we looked to the UK services sector growth figure to provide some direction for the market. Results showed that the sector expanded less than the market anticipated, and ensured a clean sweep of poor growth data this week, with the pound struggling on the news.

The market will have plenty to sink its teeth into today, with the Bank of England expected to shift its focus towards supporting growth by extending its quantitative easing program (QE) by £50bn, and the ECB projected to cut its record low interest rate by 0.25% to 0.75%. If all goes with consensus we could see a small recovery for the pound, with QE all but priced in. Elsewhere, other risk events to watch out for include French and Spanish 10-year bond auctions, and jobs data from the States.

STERLING/EURO: UK Services ensured the pound traded flat against its euro counterpart before the main event today.

• This week’s abysmal growth data from the Manufacturing, Construction and Services industries has added further credence to expectations that the Bank of England will today add an extra £50bn of monetary stimulus to the £325bn already introduced. The ECB also aims to stimulate their flagging economy today with expectations that they will reduce borrowing costs by 0.25% to 0.75% – a new record low.

• The pound is very much still the favoured currency in this pairing, and the euro will have several more hurdles to overcome today in the form of two 10 year-bond auctions from France and Spain. Risk is certainly to the downside for the euro at the moment, and we expect the pound to trade stronger towards the weekend.

STERLING/US DOLLAR: The pound fell against the greenback yesterday, losing over a cent as investors braced themselves for the announcement of further quantitative easing from the Bank of England today.

• Markets are pricing in a further £50bn of quantitative easing from the Bank of England’s Monetary Policy Committee this afternoon. If more than £50bn is announced risk will almost certainly be to the downside for the pound in this pair.

• The central bank announcements will dominate the headlines today, but investors will keep an eye out for employment data from the States this afternoon to give an indication before tomorrows all important non-farms results.

EURO/US DOLLAR: The euro lost further ground to the US dollar yesterday, yielding another cent as investors remained cautious ahead of German Factory Orders data due this morning, and the policy announcement from the European Central Bank due this afternoon.

• Investors are concerned that figures this morning will reveal a drop in German Factory Orders, with demand from Europe falling due to the eurozone’s sovereign debt crisis. Expectations of an interest rate cut from the European Central Bank this afternoon is also keeping the euro under pressure, with the ECB likely to cut rates by 0.25%.

• French and Spanish bond acutions today will keep the pressure on the euro, and ensure the safe-haven dollar remains in favour.

STERLING/AUSTRALIAN DOLLAR: Positive trade Balance data released last night reinforces the aussie dollar’s healthy position.

• Sterling struggled yesterday against the aussie dollar, hitting a new low since April. Trade balance data released last night showed encouraging signs, comfortably outperforming estimates. Asian equities performed poorly last night, reducing the impact of the positive trade balance data.

• Look for the AUD to strengthen further todaySterling looks precarious this morning trading around the 1.5180 level, and we may see further losses in the coming days.

STERLING/NEW ZEALAND DOLLAR: News today from the BoE will be the key in determining the strength of Sterling against the kiwi dollar.

• The kiwi dollar saw a sharp strengthening yesterday morning and the pair continued to trade around 1.9400. The pound saw a slight rally this morning but investors will be eagerly awaiting news from the ECB and BoE, so we expect volatility around these announcements.

• News from the BOE on monetary policy will determine the trading pattern of this pair today, but if further stimulus is announced, expect the kiwi dollar to strengthen.

STERLING/CANADIAN DOLLAR: The pound weakened against the Loonie yesterday, as demand for Sterling was undermined by poor PMI figures and the prospect of further QE from the Bank of England today.

• This pairs direction will most likely be dictated by events from the Bank of England, with additional QE expected to be announced at 12.00 BST today, this will add short term pressure to the pound.

• The loonies gains should however be fairly muted by the less than favourable oil prices at the moment. Investors will also keep one eye on jobs data from the States.