ECB And BoE Hold Rates Sending EURUSD To New Record And GBPUSD Above 2.0
March 06, 2008
ECB And BoE Hold Rates Sending EURUSD To New Record And GBPUSD Above 2.0
Thursday, 06 March 2008 14:22:24 GMT
Written by John Kicklighter, Currency Analyst
It used to be months ago that the market's response to a central bank holding its benchmark lending rate would be sharp selloff in disappointment. However, global interest rate policy has changed significantly and a number of of the G10 central banks have cut rates multiple times, and some by more than the standard quarter-percent. Therefore, when the European Central Bank and Bank of England announced their decisions to hold their respecitve benchmark lending rates unchanged, the market took the news as a sign that the euro and British pound were fundamentally stronger than most of their FX counterparts.
The ECB took it a step further with sturbbornly hawkish commentary that seemed to put a positive spin on cooling growth and financial market turmoil, backed by the confirmation that price stability was of primary importance to policy decisions. As the market absorbed these comments, EURUSD was to a new record through 1.5350 while GBPUSD rallied up to 2.0050.
Bucking the trend towards dovishness in global interest rate policy, the European monetary policy authority affirmed its concentration on maintaining price stability rather than bending to a potential downside risks to growth and the ongoing problems in financial markets. In the monthly news conference that follows each European Central Bank rate decision, President Jean Claude Trichet shaped his comments around the same mold he has used for months. Early in the prepared statement, the central banker maintained that the ECB's primary goal with monetary policy was achieving price stability and preventing second round inflation effects - the hawkish backbone that has kept the benchmark lending rate at 4.00 percent. Further into the speech, Trichet offered inflation forecasts that found a sharp upside revision. For 2008, the policy group is expected a 2.6 percent to 3.2 percent pace of price growth from 2.0 percent to 3.0 percent forecasted before. In the following year, pressures are predicted to moderate to a 1.5 percent to 2.7 percent clip, still an upward revision from 1.2 percent 2.4 percent reading before. However, somewhat dampening speculation of a rate hike any time soon, Trichet also suggested the current policy stance would keep prices stable.
Outside of the inflation outlook, Trichet's commentary surrounding economic growth and ongoing problems in the financial markets was relatively reserved. The statement's first mention of growth suggested economic fundamentals are sound; and data was pointing to moderating yet ongoing expansion. Referring to a 25 year low in unemployment and despite the record high in the euro versus both the dollar and British pound, Trichet had also said domestic and foreign demand to support growth. Nonetheless, he would suggest the European economy was being dampened by the global slowdown. This was reflected in his 2008 growth projections of 1.3 perecent to 2.1 percent from a previous forecast of 1.5 percent to 2.5 percent. Also, for the financial market, which has been one of the key components of the Federal Reserve's dovish stance, Trichet resolved that loan growth and money market growth was still robust despite the turmoil in the credit and broader financial market.
The Bank of England, on the other hand, would stand on their decision alone. The central bank does not typically release a statement with no change to the overnight lending rate. This contrasts to the ECB, whose commentary no doubt acted as the fundamental driver behind the euro rally despite a relatively unchanged policy stance. For the BoE's announcement however, the market moving facet to the hold at 5.25 percent comes from the steep discount in the pound that has accounted for the two previous rate cuts over the past three months. With policy makers' outlook for growth through the fourth quarter vastly reduced, ongoing problems in the financial markets, and virtually non-existent front-line inflation, the British policy authority certainly had scope to lower rates further. After this steady policy decision, the minutes for this meeting (due in two weeks) will be picked apart for any sign as to when and how large the next shift to rates will be.
Written by: John Kicklighter, Currency Analyst for DailyFX.com
Thursday, 06 March 2008 14:22:24 GMT
Written by John Kicklighter, Currency Analyst
It used to be months ago that the market's response to a central bank holding its benchmark lending rate would be sharp selloff in disappointment. However, global interest rate policy has changed significantly and a number of of the G10 central banks have cut rates multiple times, and some by more than the standard quarter-percent. Therefore, when the European Central Bank and Bank of England announced their decisions to hold their respecitve benchmark lending rates unchanged, the market took the news as a sign that the euro and British pound were fundamentally stronger than most of their FX counterparts.
The ECB took it a step further with sturbbornly hawkish commentary that seemed to put a positive spin on cooling growth and financial market turmoil, backed by the confirmation that price stability was of primary importance to policy decisions. As the market absorbed these comments, EURUSD was to a new record through 1.5350 while GBPUSD rallied up to 2.0050.
Bucking the trend towards dovishness in global interest rate policy, the European monetary policy authority affirmed its concentration on maintaining price stability rather than bending to a potential downside risks to growth and the ongoing problems in financial markets. In the monthly news conference that follows each European Central Bank rate decision, President Jean Claude Trichet shaped his comments around the same mold he has used for months. Early in the prepared statement, the central banker maintained that the ECB's primary goal with monetary policy was achieving price stability and preventing second round inflation effects - the hawkish backbone that has kept the benchmark lending rate at 4.00 percent. Further into the speech, Trichet offered inflation forecasts that found a sharp upside revision. For 2008, the policy group is expected a 2.6 percent to 3.2 percent pace of price growth from 2.0 percent to 3.0 percent forecasted before. In the following year, pressures are predicted to moderate to a 1.5 percent to 2.7 percent clip, still an upward revision from 1.2 percent 2.4 percent reading before. However, somewhat dampening speculation of a rate hike any time soon, Trichet also suggested the current policy stance would keep prices stable.
Outside of the inflation outlook, Trichet's commentary surrounding economic growth and ongoing problems in the financial markets was relatively reserved. The statement's first mention of growth suggested economic fundamentals are sound; and data was pointing to moderating yet ongoing expansion. Referring to a 25 year low in unemployment and despite the record high in the euro versus both the dollar and British pound, Trichet had also said domestic and foreign demand to support growth. Nonetheless, he would suggest the European economy was being dampened by the global slowdown. This was reflected in his 2008 growth projections of 1.3 perecent to 2.1 percent from a previous forecast of 1.5 percent to 2.5 percent. Also, for the financial market, which has been one of the key components of the Federal Reserve's dovish stance, Trichet resolved that loan growth and money market growth was still robust despite the turmoil in the credit and broader financial market.
The Bank of England, on the other hand, would stand on their decision alone. The central bank does not typically release a statement with no change to the overnight lending rate. This contrasts to the ECB, whose commentary no doubt acted as the fundamental driver behind the euro rally despite a relatively unchanged policy stance. For the BoE's announcement however, the market moving facet to the hold at 5.25 percent comes from the steep discount in the pound that has accounted for the two previous rate cuts over the past three months. With policy makers' outlook for growth through the fourth quarter vastly reduced, ongoing problems in the financial markets, and virtually non-existent front-line inflation, the British policy authority certainly had scope to lower rates further. After this steady policy decision, the minutes for this meeting (due in two weeks) will be picked apart for any sign as to when and how large the next shift to rates will be.
Written by: John Kicklighter, Currency Analyst for DailyFX.com
Labels: Markets
