FX Market Overview

It was all about the central bankers yesterday with the Bank of England taking centre stage as it released its quarterly inflation report which was a mixed bag to say the least. The central theme was that we can expect low interest rates for some time to come, despite their expectation that inflation will push above 3.5 percent in the next few months and the bank hinted heavily that it would shunt more money into the markets through quantitative easing programs if necessary. That departure from merely controlling inflation clearly has the backing of government or I am sure there would have been comment from the Chancellor on the matter.
The nitty gritty is that most in the city assumed the UK base rate would remain below 1 percent until the end of 2010 and the BOE’s acceptance that we would have at least one quarter of economic contraction this year was greeted with a mixture of amusement that the penny had finally dropped, concern that things may be quite bad in 2010 and relief that the BOE was at least facing the reality of the situation. As you can imagine, with that kind of bearish news ringing in their ears, traders didn’t rush out to buy Sterling. The Pound had rather a bad day and remains on the back foot today.
The other central banker in the news was US Federal Reserve chairman Ben Bernanke who was speaking about how the US was going to extract itself from current problems and its massive cash creation program. The US base rate is set to remain on hold at their current 0.25 percent level for at least a year but there are plans afoot to increase the interest paid on funds deposit by banks into the Fed. That, they feel will increase interest rates paid on deposits from clients and reduce the amount of lending; acting as a dragging anchor on credit driven economic growth.
The European Central Bank members were spoken of rather than actually speaking themselves. Greece was still the word on everyone’s lips and the ECB is planning to release an announcement explaining whether and how they might support Greece as the Greek authorities try to extricate themselves from the debt mire. Germany is in favour of help, vehemently opposed to helping or ambivalent dependent on whose report you believe. Personally, I don’t think Germany has an option other than to help because the damage to the Euro would be severe if they don’t help the ECB to act either directly or through the International Monetary Fund. And it should be remembered that German and French banks are heavily exposed to Greece already so the option not to act is simply not available to them. One newspaper puts the cost to the UK of bailing Greece out at £3.5 billion but that is pure speculation.
Overnight news that Australian unemployment has fallen was enough to boost the Australian Dollar. A jobs growth figure of 52,700 which drops the unemployment rate from 5.5% to 5.3% is great news but does call into question the Reserve Bank of Australia’s decision to leave their base interest rate on hold when they last met. A hike at the next meeting is a pretty safe bet and the Australian Dollar could well strengthen all the way through to that meeting.
Today’s news diary is a tad light but those items that are reported all have the potential to change the mood. Obviously we hope to hear from the ECB on the Greek Tragedy and we may find that the International Monetary Fund is on the newswires about Greece as well but we will also get US retails sales data and that is very interesting on the day after Mr Bernanke’s comments. Improved figures are forecast and that could let the US Dollar slip back a bit from its current position of strength as confidence returns to the minds of traders.
And finally, everyone seems to be on a diet at this time of year so how about buying a book on diet tips from a man who lost 20 stone. The problem is that he weighed 69 stone when he started dieting and he still weighs 49 stone. He claims that cutting his calorie intake from 20,000 per day helped and the gastric bypass surgery he is undertaking will help a lot. The story does beg a lot of questions. Surely at 69 stone, he couldn’t get around himself so who was fetching the food to get 20,000 calories a day into him? I can’t help thinking that person should be prosecuted for assault with an offensive diet and a variety of other offences and made to refund some of the £100,000 a year that taxpayers fork out to look after this former postman.