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Friday July 31, 2009 - 14:17:33 GMT
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FX Briefing - EUR-USD treading water

FX Briefing 31 July 2009

 

Highlights

·        EUR-USD hardly affected by equity rally

·        ECB set to confirm its monetary policy stance

·        Bank of England should continue to purchase gilts

 

EUR-USD treading water

Whereas the upbeat quarterly figures are sparking fresh waves of speculation on US stock markets in particular, they have had little impact on the forex markets so far. Although favourable equity markets usually tend to boost EUR-USD, the forex market has just been treading water: EURUSD started the week at 1.42, and briefly touched 1.43, only to come under pressure on Wednesday, dropping to almost 1.40. This movement was presumably triggered by the Chinese stock market plunge after reports (which have since been denied) that China could be set to tighten monetary policy. This made little impression on US and European stock markets, which began to soar in the second half of the week. As a result, EUR-USD strengthened slightly to 1.41,

but ended the week lower than at the end of last week.

 

The markets are probably waiting for the spate of US data due to be released shortly. The advance

GDP figures for Q2 will be published this Friday. The economy does not appear to have contracted nearly as much as in catastrophic Q1. It is uncertain, however, whether the figures have improved sufficiently to be regarded as a real turning point. Next week, further important US indicators are on the agenda, including the ISM indices and the labour market data. Here too, market participants are for the most part expecting positive results, but only to the extent that the pace of decline could have slowed down. In our view, the slower pace of decline is not enough to justify breaking out of the trading range of the past weeks.

 

Next Thursday both the ECB Governing Council and the Bank of England Monetary Policy Committee are holding their monthly meetings. The ECB Council’s policy stance is not likely to havechanged much since the last meeting. We are still expecting it to see growth and price risks as balanced: given the current Eurostat figures – the inflation rate has fallen to –0.6% in July – the pace of inflation could turn out to be somewhat lower than forecast in the last projections. Furthermore, monetary development, particularly dwindling lending activity, proves that there are no concrete price risks in the medium term. It looks as though GDP will turn out to be more or less as projected in June; however, in the meantime, the global economic climate has become slightly less hostile. On the whole, the ECB is unlikely to change its assessment of the situation.

 

The Bank of England is faced with more challenging choices. These do not involve the interest

rate decision. Changing the bank rate is not on the agenda for the time being. However, the BoE

has now exhausted its financial resources for the purchase of government bonds, £125bn. The

MPC will have to decide on Thursday whether to stock up the programme to £150bn. The targeted purchase of government bonds which was started in March, was the most important element of the BoE’s quantitative easing measures. If the BoE decides not to continue with it, the market would probably interpret this as an initial exit step, i.e. as a positive sign as to the state of the UK economy. This would presumably boost the pound, at least temporarily.

 

We see a good chance of the BoE continuing with the programme – perhaps on an extended timescale. At –0.8% quarter-on-quarter, growth in the second quarter was disappointing. The year-on-year decline of –5.6% illustrates the extent of the collapse. The housing market is just beginning to bottom out, and credit flow is amere trickle. All in all, the UK economy is still so fragile that a continuation of the purchasing programme would be justified.

 

Stephan Rieke +49 69 718-4114

Economics Department

+49 69 718-3642

volkswirtschaft@bhf-bank.com

Foreign Exchange Trading

devisenhandel@bhf-bank.com

Jörg Isselmann

+49 69 718-2695

Matthias Grabbe / Klaus Näfken

+49 69 718-2688

 

This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHF-BANK Group") solely for the information of its clients. The information and opinions in this document are based on sources believed to be reliable and acting in good faith, but no representation or warranty, express or implied, is made by any member of the BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice. The information does not constitute advice or personal recommendation, for which the duty of suitability would be owed, but may facilitate your own investment decision. Moreover, you should seek your own advice as to the suitability of an investment matter mentioned herein. Investors are reminded that the price of securities and the income from them can go down as well as up and that the past performance of an investment or a market is not necessarily indicative for future results. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the United States.

© 2007 BHF-BANK Aktiengesellschaft

All rights reserved. Please mention source when quoting from it.




 

 

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