Week in FX Europe – BoE and ECB’s Forward Guidance; What Guidance?

The Fed was dovish and as expected provided little natural support for the dollar. Both the ECB and BoE came and went, hardly making a currency ripple. Draghi mostly repeated things he had said before. The ECB’s commitment to low interest rates for an “extended period of time” still makes the EUR vulnerable to further weakness; however, Friday’s NFP report will affect the single currency’s negative momentum for now.

The ECB made no changes to its benchmark interest rates, leaving it pegged at a record low rate of +0.5%. Draghi repeated the phrase about low interest rates (forward guidance), first uttered last month, disappointing a sector of investors who had been expecting more information. He reiterated that he and his fellow policy makers would keep rates low as long as the Euro-zone requires it. However, he has managed to keep the market in the dark by not elaborating on what that actually means.

In hindsight, anyone hoping for quantitative targets of rate guidance or more detail on ECB rate duration will have been disappointed. The policy of the ECB now mirrors that of the Fed – until economic growth picks up rates will stay low. This is precisely the Fed’s mantra. Investors will now have to ignore monetary policy somewhat and concentrate on growth indicators for the US and the Eurozone for direction of the 17-member currency.

The BoE’s MPC left their bank rate on hold at the record low of +0.5% at the new governor, Mark Carney’s second meeting. The central bank also left the size of its bond purchase program unchanged at +£375m. A small percentage of the market had expected the bank to surprise investors. The markets attention now turns to next week’s BoE inflation report where it is expected that they will provide guidance on short term rates.

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