ECB decision, US NFP report push euro to 2-year low versus dollar
Markets digested a barrage of central bank monetary policy decisions last week and by the end of it we saw a sharp risk sell-off, which intensified at the end of last week following a disappointing jobs report out of the United States.
First we had the Reserve Bank of Australia’s decision to keep its key rate at 3.50 percent which came as no surprise. The exciting part came on Thursday. The Bank of England launched its third round of quantitative easing and announced it would buy an additional £50 billion of asset purchases with new printed money. The BoE will now buy £375 billion in asset purchases up from the previous amount of £325 billion.
Almost simultaneously the People’s Bank of China cut its one-year lending rate by 31 basis points to 6 percent. Shortly after, the European Central Bank announced a 25 basis point cut to its benchmark interest rates and lowered it to 0.75 percent. The ECB also slashed its deposit facility to 0 percent. Investors were disappointed as they were expecting bolder moves by the ECB, and President Mario Draghi’s painted an all but optimistic picture of the economic outlook for the common currency area which further spooked the markets. Equity markets and riskier currencies sold off during Draghi’s news conference as global growth concerns mounted.
Risk appetite took its final blow of the week after the release of the US jobs report. Non-farm payrolls rose just 80’000 in June versus consensus for 90’000 while private payrolls rose slightly compared to the previous month, to 84’000 but missed market forecasts for 102’000. The less than spectacular employment report fuelled concern over the economic recovery in the world’s largest economy and pushed US equity markets lower. The S&P 500 and Dow Jones average index closed almost one percent lower and commodity markets also sold off. Despite the report showing job growth was stagnating and not increasing at the pace that policymakers would like, it was not enough to spark more talk of an additional round of quantitative easing by the Federal Reserve. EUR/USD plunged lower following the report and extended this year’s decline before the close.
The pair opened lower and touched a two-year low by 1.2256 early on Monday. It has now stabilized around the 1.2300 handle by the time of writing, and with no concrete action taken at an EU Finance Ministers meeting on Monday gave little scope for the single currency to attempt a recovery. The underlying bias remains bearish for EUR/USD, and the pair is currently in the middle of its downward channel, suggesting more downside potential to test the bottom of the channel. The next long-term objective is a return to the levels last seen in June 2010 around the 1.1900 area.
At the start of the week, the Eurogroup of EU Finance Ministers met in Brussels on Monday to continue discussing the activation of the bloc’s rescue funds to intervene in bond markets to ease soaring borrowing costs for Italy and Spain. However, no apparent progress was made, and the group only agreed on granting Spain an extra year to meet its deficit targets and provided Spanish banks with a €30 billion loan tranche by the end of July. In the meantime, Spanish ten-year yields rose back above unsustainable levels on Monday, higher than 7 percent.
On Tuesday, the single currency did lift its head slightly above the water as news filtered that German Finance Minister Schaeuble urged the country’s Constitutional Court not to delay approving the EU’s permanent bailout fund (ESM) and that any significant delays could cause “considerable further uncertainty on markets beyond Germany”, and could weigh on the region’s credibility to implement the necessary decisions. EUR/USD rose to 1.2334 by the time of writing and EUR/JPY rose to 98.05 after hitting a five-week trough earlier by 97.31.
Fed minutes in focus
Focus turned mostly on the minutes from the Fed’s June 20th FOMC meeting tomorrow, especially after three top Fed officials set the stage for a third round of quantitative easing on Monday. Any hints of QE3 by the Fed could give scope for a short-term recovery in EUR/USD, but a correction is seen capped by 1.2700. The Bank of Japan’s policy decision on Thursday was also in focus and any additional boost to its current asset purchases program by the BOJ should lift the USD/JPY back above 80.
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