Central banks set to ease

Publication date: 5 July 2012
Author: Alistair Cotton, Currencies Direct

With the holiday in America yesterday keeping the markets quiet, we are immediately back into the action today with the Bank of England and ECB meetings at lunchtime. The BoE is expected to announce another £75 billion of QE.

Last month’s vote finished 5-4 in favour of waiting and there has not been any improvement in the general outlook for the UK economy, it is therefore very likely that the bank will extend the QE program today and Sterling is already reflecting that possibility. The ECB is expected to drop its benchmark interest rate below one per cent for the first time, and reduce its deposit rate to zero.

The reduction in the deposit rate is supposed to push banks into lending rather than parking cash as the ECB, but there is lack of demand for credit by businesses and consumers as the great deleveraging continues and it will constrain Eurozone banks ability to increases their lending.

Friday sees US non-farm payrolls released. The consensus estimate is for 90,000 jobs created in June which continues the trend of a slowing job market in America after the strong numbers posted in the first half of the year. It is looking likely that the surge in employment was partly down to the unseasonably warm winter, bringing forward many spending decisions and meaning 2012 was front loaded in terms of positive data. US economy may be flatter economically in the second half of 2012 as we build towards the election in November, especially as outright asset purchases by the Fed seem to be off the cards for now.

The main currencies pairs are very quiet in early trading this morning and will continue to be so as we build towards the central bank decisions at lunch time. Other data of note today includes German factory orders and the US ISM-non manufacturing survey out this afternoon.