The currency blog

Markets were seriously unmoved at the outcome of the policy meetings yesterday. In fact very little occurred until after we went home and really after most of New York had left for the day as well. At that point, Ben Bernanke told his audience that the Fed will tighten rates once recovery takes hold. This had more effect than comments from Trichet at his after meeting press conference although we did see the Euro dip a little when, in answer to a question about the currency being used to price oil trading, he stated that he is not actively promoting the global use of the Euro. Anyway the end result is that very little has changed from the beginning of the week with the Dollar looking soft and Sterling looking softer. With it being a long weekend for Japan, the US and Canada, it is difficult to see any fundamental change the current levels. The US trade balance looks to be the highlight for today but by then it might be too late to rescue the day as a trading session….

We saw yesterday the Bank of England keep rates on hold at 0.50% and QE remain at £175bln.  The consensus for next month on QE is split between hold at £175bln or increase to £200bln but I expect we would have more of a feel for their decision once the minutes are released from yesterday’s meeting on 21st October. Personally I think QE should remain at £175bln next month to see if things start to settle down and improve.

The European Central Bank yesterday left rates unchanged at their current record low level of 1%. Indications are that rates will remain this low for some time yet even though Trichet indicated the worst of the recession in Europe is now over. “We have signs of stabilization. We are out of the free-fall,” Trichet said. “We have to be cautious. We have to be prudent”, he added. The Central Bank Head also stated that inflation was expected to turn positive in the coming months but was by no means a threat, insinuating that there was no necessity to increase rates in the near term. The first move upwards for the benchmark rate will probably come next summer. With regards to an exit from the economic stimulus, Trichet outlined his view for a withdrawal by 2011 as governments address their inflated balance sheets and future spending plans. He said “The need for ambitious and realistic fiscal exit and consolidation strategies is becoming increasingly pressing.”

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