Tomorrow the Bank of England (BOE) and European Central Bank will grace us with their interest rate announcements. The BOE is expected to hold overnight rates at 0.5% and to keep the QE program at its present level of 375 billion pounds. The current weakness in the British pound will keep Governor Mervyn King from tampering with present policy, and, with a new Governor of the BOE in July, it makes no sense to expend any type of easing before the change of leadership unless some new crisis emerges. Current BOE policies and renewed weakness in the British economy have driven the EUR/GBP rate to 15-month highs, thus putting the pound in the middle of the “currency wars.”
The ECB announces 45 minutes later (6:45 a.m. CST) and consensus is anticipating President Draghi to hold the overnight lending rate at 0.75%. A press conference follows at 7:30. The strength of the EURO may have given the ECB some latitude to lower rates but France’s President Hollande pushed Mario Draghi into a trap. If the ECB cuts rates it will be seen caving in to French demands and the Germans will be very irate. The war of words escalated again today as the Germans maintained their public stance that the EURO was not overly strong but merely at its long-term average. Those were the exact words that President Draghi used at his last press conference. The French win their first skirmish in 150 years and Hollande begins crowing like a rooster. When will the political peacocks learn to preen less and negotiate more? The Draghi press conference will be important for the European financial press is certain to ask the ECB President if he is concerned about the recent euro strength, which will mean great volatility in the currency markets during the hour-long question-and-answer period.
Reviewing the markets since the beginning of the year: The German DAX went marginally lower for the year today as the Nikkei and S&Ps have held on to roughly 6% gains since the last day of December. While the DAX was the star performer of the developed equity markets last year, the recent euro strength has taken some of the zest out of the locomotive of the European economy. The Draghi Q&A will mean that traders have to be patient and listen before being aggressive. The EURO crosses will be very volatile. Again, the mouth of Hollande has made Mario Draghi’s job much more difficult.
Tags: BOE, DAX, ECB, EUR/GBP, Euro, Francois Hollande, Mario Draghi, Mervyn King, SPS
February 7, 2013 at 12:29 am |
“While the DAX was the star performer of the developed equity markets last year, the recent euro strength has taken some of the zest out of the locomotive of the European economy.”
Are you implying that the market increases in the equity markets reflect a stronger economy? Was the strength in the US stock market last year (especially in the 4th qtr) a reflection of a more robust GDP?
Or are equities displaying the bi-product of ZIRP?
February 7, 2013 at 4:38 am |
Asherz—the implication on the DAX was a combination of ZIRP with the sense that the breakup risk of the EU was averted;the world then viewed German assets as a cheap way to play in Euroland.You got a strong economic foundation with a “relatively” undevalued currency and if the EU actaully came under attack again you were at least invested in the soundest country—remember that German sovereign debt was always the shelter from the storm as was the German banking system and the flows from the Peripheries to the Core —verified by the balances in TARGET 2.THe present strength of the Euro and the recent price action in the DAX may mean that the Euro may be too strong for the present world economic environment—we will see if that hypothesis holds —as Max Planck would say—“science advances one funeral at a time.”