Boring monetary policy grabbed the headlines once again yesterday, as the Bank of England and the European Central Bank both decided to leave rates and alternative policy ideas alone for now. The reaction to these decisions was, however, very different. One decision generated little movement, the other lit a fire under the markets.
The Bank of England entered their 6th year of setting rates at 0.5% as of yesterday, to little surprise. This 6th year, however, will be the year that defines the Bank of England’s response to the entire global financial crisis and the legacy of recession. The decision to raise rates will of course not be taken lightly – it has the ability to propel this recovery on further as equally as it could stymie it. Markets seem keen on a rate increase by the end of the year still with short sterling contracts looking at a 25bps increase by December.
OIS swaps are less emphatic and match our expectations that we will see an increase at the end of Q1 or beginning of Q2 next year. The key for upcoming meetings will be dissent from MPC members. Carney has had them in lock-step since his arrival, but the data from the UK economy, certainly if it is able to continue at this current rate, is exactly what those of a hawkish disposition will be looking for. We expect to see a dissenting voice in Q2 from at least one member of the Monetary Policy Committee.
Yesterday’s hold in policy gave sterling little impetus.
The European Central Bank once again flattered to deceive and decided to hold monetary policy as is once again. The main repurchasing rate has remained at 0.25% while the deposit rate will stay at 0.0%. While no means a consensus view, a determined proportion of analysts had expected some movement from the Executive Council. None was to be seen.
The press conference from the ECB Chair Mario Draghi later drove the single currency to its highest level against the USD of the year. Draghi’s tone has changed in 2014. One policy that those of us in the markets believed could be used yesterday involves the use of liquidity from previous purchases of peripheral economy debt. Draghi’s attitude to this ‘non-sterilisation’ was to talk it down quite dramatically; a severe disappointment.
There was also no mention of negative deposit rates when asked. To be honest, we doubt this would work in the longer term however. If the ECB wants to convince the European banking sector that it needs to lend more to consumers and businesses then it may consider charging banks to deposit cash with it. We believe that banks would simply take the loss as opposed to risking capital with the possibility of default.
Draghi’s comments that the euro has been an “island of stability” is also almost beyond parody. It was an island of volatility yesterday in any case, charging to the highest level of the year against the USD, something that has continued overnight. GBPEUR has broken below the 1.21 level while EURJPY will be looking towards the 143.00 level we would think.
EURUSD’s problems could be exacerbated by payrolls later today. The market expectation seems to have settled at 149,000 jobs added in February, an optimistic figure given the weather effects on the services industry shown in Wednesday’s ISM number. Anything below is going to really increase chatter that the US economy is really not going well, an argument that we think it is too early to make. April’s payrolls number will be a lot more transparent, especially in regards to the the weather.
We could easily see GBPUSD make a run at 1.68 this afternoon if the figure is poor with EURUSD eyeing up 1.40. Payrolls, alongside the latest readings of the unemployment and participation rates are due at 13.30.
