Friday, August 05, 2005
Bank of England cuts UK interest rates by 25 basis points whilst ECB again does nothing
They did however indicate that another cut in the short term was unlikely, citing a rise in equities prices and a fall in the exchange rate should help to shore up activity.
As a result of better than expected data out of the UK earlier in the week, the market drifted away from fully pricing in a cut in UK rates, and sterling softened slightly after the announcement at noon yesterday.
However a late sell-off of the Dollar saw sterling strengthen breaching the 1.7800 level against the buck, but weakened further against the single currency, as the pound lacked independent direction.
The Dollar slid again on the exchanges yesterday, ahead of today’s key non-farm payrolls data, next week’s FOMC meeting and as pessimism over the Euro continues to diminish as growth prospects strengthen in the Euro-Zone.
The Dollar fell to two month lows versus the Euro as short-term investors unwound long-dollar positions ahead of today’s data release. Analysts expect to see the creation of about 180k new jobs in July.
There were no surprises from the European Central Bank, as they left rates on hold yesterday at 2% for the 26th month.
The Yen weakened across the board yesterday, as opposition to the reform bills continued, sparking fears of a snap election in Japan. A rejection of the bill to privatise the nations postal system, would be considered tantamount to a vote of no confidence. A ‘no’ vote could trigger a knee-jerk selling of the yen.
Elsewhere, European equity markets fell lower yesterday witnessing profit taking ahead of today’s US non-farm payrolls. Wall Street also ended lower yesterday after disappointing retail sales from many US companies. Profit taking also pushed the Nikkei lower.
Thursday, August 04, 2005
Bank of England Reduces Interest Rates by 0.25 Percentage Points to 4.5%
In the first half of the year, output growth in the United Kingdom was subdued. Household spending and business investment growth have slowed. Although there are some signs of a pickup in consumer spending, downside risks remain in the near term. Looking further ahead, however, the rise in equity prices and the recent fall in the exchange rate should boost activity.
CPI inflation was 2.0% in June. Higher oil prices may raise inflation further in the short term. But, in the Committee's view, the slackening in the pressure of demand on supply capacity should lead to some moderation in inflation.
Against that background, the Committee judged that a decrease of 0.25 percentage points in the repo rate to 4.5% was necessary to keep CPI inflation on track to meet the 2% target in the medium term.
The Committee's latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 10 August.
The minutes of the meeting will be published at 9.30am on Wednesday 17 August.
Wednesday, August 03, 2005
Attention focussed on Central Bank meetings tomorrow
The Dollar has subsequently bounced back as the market focus turns to the US jobs report due out on Friday, and any indication it will offer as to the Fed’s longer term tightening campaign.
Solid US data yesterday raised expectations that the Fed may hike rates to 3.5% as early as next Tuesday, and encouraged flows into the US currency. However general sentiment is that the Federal Reserve will need to lift rates higher than 4% next year to help the Greenback extend its flagging rally.
Improved economic fundamentals in the Eurozone have eroded chances of an ECB rate cut at their meeting tomorrow.
Markets will watch with interest, the release of the service sector PMI this morning, it is expected to have edged up to 53.4 in July. Data such as Germany’s IFO reaching 7-month highs and an expected decline in Germany’s unemployment has helped underpin the single currency.
July’s service sector PMI is also due out of the UK this morning and is expected to drop slightly to 55.5. The Bank of England meets tomorrow and is widely expected to cut interest rates by 25 basis points; although this cut has been factored into the market, we could see some sell-off of the pound following the decision as sterling’s interest differential advantages erode.
Asian currencies including the Yen rose yesterday, helped by indications that Japanese deflation may finally be coming to an end, increased optimism was reflected in the equity markets.
However there is growing uncertainty over the future of Japans Prime Minister Junichiro Koizumi. The upper house votes this Friday on the postal reform bill. A rejection could trigger a snap election and cause the collapse of Koizumi’s government.
