Inflation data from the UK yesterday unexpectedly dropped, increasing the likelihood of further stimulus and also justifying the action the Bank of England has recently taken to reintroduce quantitative easing.Economist forecast further weakness from the pound as dovish rhetoric from the BoE will undoubtedly keep downward pressure on the currency, especially when the global growth outlook is set to diminish over the coming months.
Versus the euro the pound managed to reverse any losses it had made throughout the day, mainly due to the a combination of slightly downbeat German ZEW figures and news that the credit rating agency, Moody’s, decided to downgrade 13 Italian banks – Moody’s citing their decision that Italy’s banking sector has “high direct exposure” to sovereign debt.
Today at 9:30am we see the release of the Bank of England’s MPC minutes and key unemployment change figures, which should offer more clarity to the state of the UK economy and how officials view the actions needed to stimulate growth.
The euro remained relatively range-bound versus the pound giving way later in the day to both the pound and the dollar as Ben Bernanke spoke about the Federal Reserves plan to boost the US economic recovery.
It was a day of negative sentiment outweighing the positive with disappointing data being loosely supported by upbeat sentiment from market commentators. First up we had the release of German ZEW economic sentiment which was down from the previous month, but mainly inline with median forecasts. Later in the day Moody’s announced the downgrade of 13 Italian banks, as news last week saw the Italian government credit grade also downgraded. Moody’s said that normally banks are not rated higher than a government and their move was put down to the risks of shared exposure and contagion.
In other news, Goldman Sachs offered the euro some form of support as a senior member stated that they believe the euro will prevail at the end of this current period of “muddling through”. They believe that the eurozone should benefit from a much “stronger institutional framework and economic policy coordination”. The enhancements to the region could alter the euro into a much more attractive currency than it presently is. At present, this has yet to materialise and in the short-term the markets will be focused on the ability of Spanish banks to receive as much as €100Bn ($123 billion) by the European Financial Stability Facility at a vote in Germany tomorrow.
No significant data is released from the eurozone today.
The Greenback remained relatively flat in early morning trade as it awaited the major risk event of the day as Ben Bernanke, the Federal Reserve chairman, spoke about the state of the US economy and what measures were needed to halt a faulting labour market.
Initially, the Fed chairman, when speaking in the afternoon, gave little or no insight into the specific types of stimuli the central bank would use to stem the faltering economy. With this, equities fell and the dollar gained as no hard evidence of action was given and the understanding of what type of stimulus was needed became more clouded.
However, later in Bernanke’s speech he did then outline some options that the central bank would consider at their next meeting on the 31st July. Any further monetary stimulus in whatever form will be data and events dependent. With a focus on faltering growth, and flat-lining employment figures the Federal Reserve will no doubt also be looking at developments in Europe and the potential knock on affects of a worsening of the European debt crisis.
Today we see Building Permits and Housing starts at 1:30pm, Ben Bernanke testifies to congress at 3pm and the Fed Beige Book is released at 7pm.
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