Week in FX Europe – ECB Holds Rates As Deflation Fears Rise

With the Eurozone affected by very weak inflation, the markets were waiting to see if the ECB would take any action on Thursday. With the benchmark interest rate at a record low level of 0.25%, clearly there isn’t much room to reduce rates, but there was talk of lowering deposit rates below zero. Such a move would likely hurt the euro due to investors dumping their euros in favor of other currencies. When this didn’t happen, the euro jumped, gaining about a cent after Draghi’s press conference. Draghi then reiterated what we’ve heard many times over, which is that for the foreseeable future interest rates will stay at their current levels or could go even lower. What action, if any, the ECB takes when it sets rates in March will be heavily influenced by the inflation situation in the Eurozone. If inflation weakens further, the ECB will be under strong pressure to make a move, such as lowering deposit rates.

This week the US Nonfarm Employment Change, which came in at 113,000 new jobs added to the economy in January. Earlier this week, ADP Non-Farm Employment Change disappointed badly, sliding to 175 thousand in January, compared to 238 thousand a month earlier. This was well shy of the estimate of 191 thousand. The lower than expected employment numbers this week could mean the Fed could delay its next QE taper and the fallout from such a negative message could hurt the US dollar. This key release could dictate whether the Federal Reserve goes ahead with a third QE taper in February. The Federal Reserve has scaled down its bond-buying scheme with two tapers of $10 billion, reducing QE to $65 billion each month. Barring any unexpected downturns in the US economy, we could see QE wrapped up the end of 2014.

Bank of England Holds Rates With No Statement
There were no surprises from the BOE, which kept its asset purchase facility and interest rate levels unchanged. QE remains pegged at 375 billion pounds, while the benchmark interest rate stays at 0.50%. With the British economy showing marked improvement, there is pressure on the BOE to raise interest rates, but Governor Mark Carney has balked until now. We’ll get a look at the BOE Inflation Report and the Unemployment Rate later in the month, and if these key indicators are positive, speculation will increase about a rate hike.

British Manufacturing numbers disappointed on Friday, as Manufacturing Production posted a 0.3% gain in January. This was up from 0.0% a month ago, but fell short of the estimate of 0.6%. Industrial Production followed suit, posting a gain of 0.4% but missing the forecast of 0.7%. With Manufacturing PMI weakening in January, there is trouble afoot in the UK manufacturing sector.

• ECB Will Gain New Oversight Powers in November
• UK Recovery Threatened by Low Wages
• Bank of England Held Rates With No Statement
• ECB Held Rates As Inflation Fears Grow
• UK Economy To Grow 2.5 Percent in 2014
• UK Trade Deficit Narrows But Manufacturing Slows Down
• Europe’s Court Will Decide on Bond-Buying by ECB
• European Stocks Trading Lower As Germany Challenges OMT
• ECB Watching Global Market Turmoil Closely
• Rising U.K. House Prices Supporting Consumer Spending
• EU Ready For Record Free-Trade Deal With US
• BOE Holds Policy as Debate Continues
• ECB Ready to Wait Until March
• EU Prepared to Lift Tariffs on U.S. Imports
• U.K. Retailers Take Drastic Action
• Eurozone Retail Sales Fall in December
• Greek Bond Yields Drop After EU Could Extend Loans
• ECB Has Options to Deal With Deflation
• Italy Considering Suing S&P For Downgrade
• UK Construction Grows to Pre-Crisis Levels
• Greece To Get Tax Evader’s Info But No Lost Revenue From Switzerland
• European Business Activity Rises in December
• Hungarian Forint Next In Line To Suffer Heavy Declines
• European Banks Book In Worst Profits In Decade
• Greek Factory Output Raises Hope for Recovery
• Turkish FinMin Says Domestic Issues Taken Out of Context
• UK Manufacturing Rises in January Boosted by Exports
• Merkel’s Influence Growing in Europe
• Germany Rumoured To Be Considering Greek 3rd Aid Package
• ECB To Reveal Bank Balance Sheet Review in March
• ECB Now Faced with Deflation Concerns

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.