EQUITIES MOVING AND ECB MAKE FOR A HEAVY DAY ON MARKETS

EQUITIES MOVING AND ECB MAKE FOR A HEAVY DAY ON MARKETS

Stalemate was the key word for markets yesterday. EUR/USD, a big driver of major Sterling currency pairs, remained almost entirely undecided on direction for the day, as investors remained ambivalent on political proceedings this week, despite US corporate behemoths GM and Chrysler looking increasingly likely for a juicing by the bailiffs. EUR/USD remained around the 1.30 – 1.31 level for most of the day with close of play looking to be moving in the Dollar’s favour at around the 1.30 level. GBP/USD, as expected, moved up towards the 1.44 level in the morning, helped by some reasonably improved UK Manufacturing data, before ebbing its way towards the mid 1.4350 region for close as traders positioned themselves for today’s events.

Currently though, we have one situation counteracting another in terms of FX drivers. Under normal conditions, sentiment surrounding the two US motoring giants could be expected to fuel some hefty Dollar strength, however, the spectre of US money supply expansion combined with desperate hope over the G-20 is keeping traders from bundling into the currency. In fact, what could be unfolding could be considered epic in proportion as the Euro and the Dollar fight it out over which is more attractive in terms of capital preservation and future growth potential. Tomorrow will certainly be a help in settling this argument, at least for the short-term. Any view given by the ECB which may suggest that the Central Bank is entirely happy with keeping quantitative easing firmly off its agenda could certainly prop up EUR/USD and shield GBP/USD from losses whilst damaging GBP/EUR. However, if investors consider that the Eurozone may be running the same risks of monetary inflation and devaluation as the US in the not too distant future, with the ECB deciding that it has to consider an expansion of its money supply, then the Euro could take a dive. This would benefit GBP/EUR heartily but may spell bad news for GBP/USD.

We will therefore be watching Europe very closely today. There is little doubt that base rate for the region will be cut by 50 basis points. This is however of no concern in light of the Bank’s Press Conference following its decision (1:30 PM GMT), where its views on policy will be aired. As said above, dovishness could prompt some big moves, but hawkishness, with the Bank being belligerent regarding inflation risk, may not shift markets a great deal. Thus far today though, a good spread of decent economic data for both the US and the UK, including a very promising UK Nationwide House Price Index, at its best level since October 2007, are pulling equities up and giving all Sterling pairs some decent velocity. Expect GBP/EUR to hold around 1.0950 – 1.10 before the ECB announcement with GBP/USD moving around 1.45-1.47.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx


This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

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