Currency Watch: The calm before the storm

This week’s FX markets have been a bit of a snorefest with everybody sat on their hands and waiting for the Bank of England and the European Central Bank to announce their latest monetary policy decisions.

Risk did sell off slightly in Wednesday’s thinly traded Independence Day markets with the dollar about a cent stronger against the pound and the euro and this simply means that we are back towards the prices we were seeing at the beginning of the week.

The Bank of England’s decision, since the minutes of the previous meeting became public, has become a matter of not if further QE is needed but how much. The voting record last month was 5-4 in favour of holding policy with the Governor Mervyn King one of the members voting for additional stimulus. Since then, the news from the UK and global economies have both worsened and it has become a debate over the amount.

The committee has gone for £50bn; spread over the remaining months between now and the November Inflation Report it will act as a useful roadmap for progress.

This combined with the latest “funding for lending” plan could be a useful 1-2 punch for the UK economy but it is the European economy we still remain the most worried about.

Predicting the ECB has become a real difficulty in the past few months with the decisions becoming increasingly hard to fathom. Normal form for the people in Frankfurt is to first worry about inflation, then worry about inflation and finally worry some more about inflation. This policy provoked two of the most disastrous rate rises in recent central bank history and these were swiftly axed once growth slowed dramatically.

Growth is now the issue and the markets are expecting a cut to a record low of at least 0.75% by Mario Draghi. The following press conference outlined that the move was unanimous however we have to wonder why Draghi’s press conference was so negative and yet they only cut rates by 25bps.

We think the dramatic slip in euro could be as a result of market belief that could be it from the ECB for now i.e. no more LTROs. The market did not like this

Prospect’s for the dollar remain all about the jobs market in the US with growth wobbling hugely in the past few months. Further falls are likely to provoke additional calls for the Fed to increase QE and the upcoming election and the “fiscal cliff” add additional event risk to the mix.

Summer is normally quiet, this one doesn’t look like it wants to be.