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What To Expect From ECB And BoE

By Kathy LienForexJan 09, 2013 11:32AM ET
What To Expect From ECB And BoE
By Kathy Lien   |  Jan 09, 2013 11:32AM ET
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The euro and British pound are trading lower this morning against the U.S. dollar ahead of Thursday's monetary policy meetings. European currencies continue to move to their own beat as commodity currencies rebound alongside equities. In fact, the GBP sold off despite the strong performance of the FTSE, which climbed to its highest level since 2008 today. While the underperformance of the EUR and GBP can be attributed to weaker than expected economic data, both the U.K. trade balance and German industrial production improved in the month of November compared to October. The only explanation then is that euro traders are still worried about potential caution from the ECB.

What Will Draghi Say?
Both central banks are expected to leave monetary policy unchanged but as usual, comments from ECB President Draghi at the post monetary policy meeting press conference could save or sink the euro. Before we talk about what Draghi could say, lets first take a look at how the U.K. and Euro-zone economies performed since the last monetary policy meeting.

U.K. -- How Has The Economy Performed Since Last BoE Meeting?
According to table below, there has been slightly more deterioration than improvement in the U.K. economy over the past month. While retail sales in November stabilized, consumer confidence fell steeply in December as spending growth weakened. This suggests that weaker consumer spending could weigh on growth in the fourth quarter. Inflationary pressures also declined as the labor market and housing market held steady. Improvements in the manufacturing sector were offset by a deeper contraction in the service and construction sectors. Overall, market indicators such as the FTSE and U.K. bond yields increased but this may not be enough to make the central bank less pessimistic. The last time the BoE met, MPC members voted 8 to 1 to keep their asset purchase program unchanged. The lone dissenter was David Miles who has consistently voted for more Quantitative Easing. For the BoE, their challenge is to manage monetary policy during a period of stagnant growth and rising inflationary pressures. While inflation has eased over the past month, energy companies are expected to raise prices. In December, the central bank was less concerned about international conditions and more worried about the high level of the GBP/USD - we don't expect these fears to change. However we'll hear none of that tomorrow because the BoE does not provide any details until the minutes are released 2 weeks later when monetary policy is left unchanged. As a result, the BoE meeting should be a nonevent for the GBP.
UK Data And The GBP
UK Data And The GBP

EZ -- How Has The Economy Performed Since Last ECB Meeting?
In contrast to the U.K., there was slightly more improvement than deterioration in the Euro zone over the past month. While manufacturing activity contracted at a slightly faster pace last month, service sector activity, business and investor confidence in Germany, the region's largest economy improved dramatically in December. With Spanish and Italian bond yields continuing to fall and the U.S. reaching a Fiscal Cliff deal, some of the central bank's primary concerns should have receded. There has been no major change in labor market, which helped support retail sales. Yet investors are still nervous because the last time the ECB met, they didn't like what Draghi had to say. Interest rates were left unchanged at 0.75% but the euro sold off because the European Central Bank downgraded their 2012 and 2013 growth forecasts along with next year's inflation estimates and had a wide discussion" about interest rates (including negative rates). At the time, they said the risks to their economic outlook were to the downside but with Spanish 10-year bond yields falling and the U.S. reaching a Fiscal Cliff deal, we don't expect Draghi's comments on Thursday to be as damaging to the EUR/USD as last month, when the currency pair fell from a high of 1.3086 down to a low of 1.2950 following the ECB meeting.
EU Data And The EUR
EU Data And The EUR

Kathy Lien, Managing Director of FX Strategy for BK Asset Management
What To Expect From ECB And BoE

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What To Expect From ECB And BoE

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