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.


* GBP Bank of England Inflation Report
* AUD Employment Change
* USD Advance Retail Sales
* CNY Consumer Price Index
* EUR French Gross Domestic Product
* EUR German Gross Domestic Product
* USD U. of Michigan Consumer Confidence

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza