It was a slow and steady start to the week for the FX markets. After weeks of waiting, investors’ eyes were eagerly on Thursday’s ECB rate decision and press conference to see what measures ECB chief Mario Draghi would come up with in order to fight the threat of deflation from the eurozone. Monday saw Germany’s m/m inflation print lower than expected, showing that prices actually fell -0.1%, rather than the expected modest increase of 0.1%. On the back of the news, EUR/USD dropped from 1.3635 to 1.3590.
UK’s strong data continued with the Manufacturing PMI printing as expected at 57.0, well in expansion territory. US data kicked off this week with the fumbled release of the ISM Manufacturing PMI. Initially, the release printed 53.2, a drop on the month before, and was then re-released at 56, an increase on the month before, until finally, a revised figure of 55.4 was issued. The Institute for Supply Management blamed a computer error with regard to seasonal adjustments.
By Alex Edwards at UKForex, an international money transfer service
As expected, Tuesday saw Australia keep interest rates on hold at 2.5%, and the accompanying statement included no real surprises. Aussie Retail Sales undershot the forecast of 0.3%, printing 0.2% growth m/m. At the same time, UK’s Construction PMI again came out strong, with a reading of 60.0. While this was slightly lower than forecast and the lowest reading in seven months, the survey nevertheless showed that the building sector remains in rude health. Eurozone Flash CPI undershot expectations with a reading of 0.5%, compared to the expected 0.7%. This was offset slightly when eurozone unemployment dropped to 11.7% rather than holding steady at 11.8% as expected. EUR/USD dropped, dipping under 1.36 again. However, with the markets pre-occupied with Thursday’s announcement, the move was less than would have normally been expected.
Wednesday started with better than expected Australian GDP, which showed a quarterly increase of 1.1%. With most of the growth being fuelled by the mining sector, worries remain about the Australian economy’s reliance on coal and iron ore exports. UK Services PMI came in at 58.6, rounding off yet another good batch of survey releases from the UK. UK Q2 GDP looks set to at least match Q1s 0.8% figure – this would mean the economy has finally got back to its pre-crash level. GBP/USD moved up from its week low of 1.67 to trade as high as 1.6760. Canada left rates unchanged at 1%, whilst the US ISM Non-Manufacturing PMI came out better than expected at 56.3.
Thursday started with a worse than expected Australia trade balance, showing a deficit for April of -0.12B vs. the forecast surplus of 0.40B. Later in the morning, German Factory Orders and the UK Halifax HPI printed far better than anticipated, and showed how well these economies are currently performing compared to some of their near neighbours. Lunch-time finally brought the ECB rate decision, with the benchmark rate cut 10bp to 0.15% and the deposit rate taken into negative territory with a 10bp cut to -0.1%. By doing so, it became the first major central bank to charge for deposits held by it. At the accompanying press conference, ECB President Draghi unveiled a Targeted Long Term Refinancing Operation, due to commence in September/October. The TLTRO consists of €400bn of cheap loans available to banks and repayable over two years. Banks who pass on the benefits to SMEs will get four years to pay back what they have borrowed. Other measures announced included future plans to buy asset-backed securities, as well as a suspension of the policy of draining liquidity from its crisis-era bond purchases, a watered-down QE of sorts. Bourses around the world reacted positively to the news, with the German DAX breaching the 10,000 level for the first time in its history, and the Dow Jones also hitting an all-time high. Commodity currencies were the big winners, with AUD/USD reaching .9350 and NZD/USD getting to .8525. GBP/EUR hit a 16-month high of 1.2390 on the release, however, as the markets calmed down, it retraced these gains to settle just above 1.23. EUR/USD moved violently on the release, dropping from 1.3610 to 1.3510, then moving swiftly back up to 1.3660. As most of the measures were forecast, some were left disappointed. However, Draghi stressed the door has been left open for more easing in the future.
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