ECB's tight stance temporarily boosts euro

USD

The dollar fell on Thursday due to news from Europe where the ECB and the BOE both had their monthly rate meetings and kept policy unchanged when they had been expected to take a more pro-easing line. Their more reserved approach stood in complete contrast to the actions of the Fed which continues easing. Recent commentary from Bernanke and Yellen had also defended the Fed's policy on QE. Positive expectations for a strong Non-Farm Payrolls result also drove up risk appetite. Both the Initial Jobless Claims and Continuing Claims data out on Thursday supported the heightened expectations after showing better-than-expected prints. In the end the market was right as Payrolls overshot projections leading to a stronger dollar as it indicted less possibility of further QE. Other data on Thursday showed the Trade Balance in negative territory of -44.4bn when it had been expected to only fall to -42.6bn in January.


EUR

The euro rose strongly on Thursday after the president of the ECB Mario Draghi dismissed the idea of cutting rates or using QE to stimulate the economy. Many had speculated the ECB might loosen its monetary policy at its monthly meeting but this didn't turn out to be the case and the euro recovered strongly. The rally was further boosted by the fact that the ECB's stance was so different to that adopted by the BOJ and the Fed. In addition, the ECB is the only central bank which is actually clawing money back from the system as euro-zone banks repay their LTROs so this also supported the euro. On the data front German Factory Orders (Jan) took the edge off the euro's rally after they fell much more deeply than expected – to -2.5% from -1.9% y/y and -1.9% from 1.1% m/m.


GBP

The pound traded mixed but rose slightly versus the dollar after the BOE decided to keep rates unchanged in March and did not increase QE as had been feared. This helped support the pound, which had weakened on expectations that more pro-easing policies might be forthcoming at this month's meeting. No further details were given and we shall have to await the minutes of the meeting on 20th March to assess how the committee voted. Part of the reason for the expected increase in stimulus had been the minutes of the February meeting which had shown 3 out of the 9 members had voted for stimulus including the governor Sir Mervyn King.On the data front there were no further releases although BOE Inflation forecasts on Friday has shown a rise to 3.6% from 3.5%, increasing the hawkishness of the BOE's outlook for the next 12 months.


JPY

The yen fell heavily on Thursday after central banks in Europe unexpectedly kept their monetary policies unchanged contrasting sharply with the BOJ's more aggressive stance. A boost in U.S employment expectations ahead of Payrolls also fuelled weakness for the yen versus the greenback. On the data front, results were overall slightly better-than-expected although not enough to support the yen as deflation remains the overarching concern. GDP, on an annualized basis, for Q4 rose by 0.2% from -0.4% previously but this didn't really help the yen, q/q showed a slight improvement to 0.0% from -0.1% previously although this was still slightly less than expected. The Trade Balance (Jan) fell deeply to 1.48tr yen but this was not quite as much as the 1.51tr expected; the Current account also fell to -364.8bn from -264.1bn when a drop to -611.5bn had been expected. Bank Lending in February rose by 1.9% (ex-trust) from 1.6% and 1.5% y/y from 1.3% previously.