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Jeudi 4 Juillet 2013

ETX Capital’s chief FX dealer Richard Wiltshire comments on Sterling

GBP had been under a certain amount of pressure all morning prior to the Bank of England rate decision and release of the asset purchase target, although this was deemed to be largely due to uncertainty with the changes in personnel and the first meeting of new Governor Mark Carney. General expectations were for little to actually come from it with the market generally expecting to wait for the August inflation report before we were to get any insight in to forward rate guidance and Mr Carney’s plans for the future.

Whilst rates were left unchanged at 0.5% and asset purchases at £375 billion, the statement that followed signalling rates will remain low for a longer period of time caught the market unawares and Sterling traders scrambled to hit the “sell” button. The significant upward movement in market interest rates will weigh on the outlook for growth and inflation and "in the Committee's view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy", the BoE said.

It would be a reasonable assumption that this communiqué signals the start of “forward guidance” from the Bank from here on in. “The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds.” This analysis would have an important bearing on the Committee’s policy discussions in August which will ensure that the market will be on tenterhooks immediately prior to next month’s meeting as the “Old Lady” adopts a new policy style.

With European Central Bank chief Mario Draghi adopting a similar prolonged low rates tone to the BoE which may well ensure EURGBP continues to trade sideways around the pivotal 0.8500 level for a while, the market may well decide there is better value in shorting GBP against the dollar short term as a combination of the Fed Reserve “tapering plan” and the implied holding of lower rates in the UK make buying it a brave call despite ongoing improving data from the UK. Would expect to see eager sellers on any rallies towards the 1.5300/50 level and with some short term supports taken out today a dip to 1.5000 area may represent value for those brave enough to want to get long, however as we know these things don’t move in straight lines and with Non Farm Payrolls tomorrow we could be in for a “fiery” end to a relatively lacklustre week.

ETX Capital’s market strategist Ishaq Siddiqi wraps up today’s events:

Dovish tone out of both the Bank of England and the European Central Bank have seen equity markets shoot up but sterling and the euro get a beating. At the same time, easing concerns over the political situation in Egypt following the removal or Morsi together with Portugal’s PM and coalition partners making some headway on an agreement to avert a collapse of the government, have lifted sentiment. FTSE100 jumps over the 6400 mark, on course to post its biggest one-day gain since November 2001 while sterling gets knocked down to $1.50 while the EuroStoxx50 index advances 68 points and the euro trades at $1.29, recovering a touch from the $1.28 level.

Peripheral bond yields ease further and oil prices come off on the Egyptian developments. Volumes are thinner due to the US being shut for Independence Day but that hasn’t prevented the bulls to pile into the market as dovish central banks build the case for ultra low rates for a prolonged period and the prospects for more stimulus if needed.

The BOE shot first, keeping policies unchanged as expected but Carney showed the market who is boss at his first policy meeting by releasing a forward guidance statement to keep interest rates low and saying that the recent rise in bond yields owning to the Fed’s plans to taper stimulus, is not warranted and will weigh on economic growth. The BOE said the economy in the UK remains weak despite a recovery in train, implying that there remains room for more QE should the situation warrant it.

Coincidently, the ECB also provided a forward guidance at the press conference following the policy meeting which saw the central bank keep interest rates at ultra lows. The ECB like the BOE took a dovish tone by saying the Fed’s tapering intentions has led to an unwarranted rise in bond yields which hurts economic prospects in the euro zone and embraced a forward guidance by saying rates will remain low for a prolonged period [timeframe not given], a unanimous decision on the GC of the ECB. The ECB essentially said it is willing to do more to stimulate the euro zone economy and is not shy about telling the market about its future action but was quick to say the ECB is singing its own song and not following the BOE’s move today. On Greece and Portugal, the ECB remained tight-lipped on the whole, downplaying the market

Overall when assessing both remarks form the BOE and the ECB, it’s clear we are in a moving into a new phase of monetary policy in which communication is the tool and for stock investors, clarity on this front couldn’t be more helpful given the backdrop of one major central bank [the Fed] announcing plans to taper liquidity. At least we know the BOE and the ECB stand ready to act and will support economies with record low rates for an unprecedented period in the history of global economics. Looking ahead now, attention is turning to the US nonfarm payrolls tomorrow with Wednesday’s stellar ADP jobs report and a decline in jobless claims boding well for a bumper outcome on the US labour market front.

Ishaq Siddiqi
Market Strategist

ETX Capital
Beaufort House
15 St. Botolph Street
London EC3A 7DT T

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