The European Central Bank became the centre in the financial scene last week, as FX markets anticipate a justification from ECB President Mario Draghi over the currency’s 14-month high levels. With the Federal Reserve and the Bank of Japan are on loose monetary policies, weakening their currencies to boost growth, Draghi stated that the Euro’s value is broadly reflected on the economic fundamental after talks of “currency wars” resurfaced. Moreover, Bank of England Governor-elect Mark Carney, had testified to UK lawmakers on the country’s economy, adding that “central banks should be flexible in meeting inflation targets and that any change to monetary regimes should not be made lightly”.
The Euro started the week on a negative note at 1.3640, as the currency lost steam ahead of the ECB meeting on Thursday. The single currency dropped to 1.3459 levels, on renewed concern about Europe’s debt crisis. The Euro climbed to 1.3597 after a report showed that European services and factory output contracted less than initially estimated in January. The Euro collapsed following the ECB press conference, after President Mario Draghi suggested that its recent appreciation could damp inflation. The single currency dropped to a low 1.3370, and closed the week at 1.3365. The Sterling Pound endured a volatile week, as the market turns its focus to the EUR and the JPY. Cable opened the week at 1.5693, only to rise to 1.5805 as political turmoil pressured Spanish and Italian government bonds and boosted the relative appeal of the British currency. The Pound dropped significantly against the US Dollar, ahead of the Bank of England meeting. The Sterling Pound then surged to 1.5845 after the BoE refrained from boosting its asset purchase target. The Pound closed the week at 1.5801. The Japanese Yen opened the week at 92.77, weakening against the US Dollar throughout the week, to touch a high of 94.06 on Wednesday. The Japanese Yen then gained the most since March 2011 against the USD on Friday, after Finance Minister Aso spoke at the lower house of the parliament to answer opposition questions, stating that the USDJPY weakened more than intended. The JPY dropped to a low 92.17, and closed the week at 92.68. The Swiss Franc weakened against the greenback since the beginning of the week. The CHF opened the week at 0.9080, weakening to a high of 0.9202 on Thursday, in tandem with the Euro, after investors switched to risk aversion mode following the ECB Press conference. The Swiss Franc closed the week at 0.9174.
Manufacturing industry in the United States slightly slowed in January, but came better than forecasted, hiking demand for labor, and assisting to moderate the economy ahead of the upcoming budget talks. More jobs, is most likely to equate to a rise in consumer spending, which counts for 70% of the US economy. The Institute for Supply Management’s factory index slipped to 55.2 from a 10-month high in December. As the number above 50 signals expansion, the index surpassed the expected 55.0. A continuous hike in the manufacturing industries will make-up for three straight months of contraction, and will create more jobs.
The number of Americans filing applications for unemployment benefits fell by 5,000 to 366,000, although higher than the expected 360,000. As the US government suffered trouble adjusting the data for seasonal swings, claims have fluctuated in prior weeks. Unemployment claims are now at levels that show that the pace of dismissals only slightly changed, compared to the previous year. The pace of dismissals may indicate that companies are poised to boost hiring’s as demand holds up. To no one’s surprise, the European Central Bank have kept the key benchmark interest rate unchanged at 0.75 percent. The Euro dropped the most in 7-months, after ECB President Mario Draghi suggested that its recent appreciation could damp inflation, which raises the speculation that interest rate cuts are a possibility in the future. Draghi signaled that policy makers are concerned that the single-currency’s strength will block their efforts to pull the economy out of a recession. “The exchange rate is not a policy target, buy it is important for growth and price stability” said the ECB President, explaining that the central bank would “want to see if the appreciation is sustained, and if it alters the assessment of the risks to price stability”.
Moreover, Mario Draghi noted that the ECB will publish new economic projections next month, and stressed that officials will “maintain our accommodative monetary stance”. While the US and Japan expand their balance sheets, the ECBs’ is shrinking, as banks have started paying back the 3-year emergency loans early, while the Euro fueled to 14-months high. This raised talks of a “currency war” between central banks to boost growth through devaluation of their currency. Although, ECB President Draghi dismissed such talks, and stated that the value of the Euro reflects largely the economic fundamentals.
The Bank of England left its monetary policy unchanged, as policy makers kept focus on a credit- boosting program to aid the recovery. Bank of England policymakers left the key benchmark interest rate unchanged at 0.5%. The Monetary Policy Committee, led by Governor Mervyn King, said the target for its bond purchases will remain at 375 billion pounds. Officials are monitoring the impact of their Funding for Lending Scheme, which started in August. There are signs the program is helping the mortgage market, and Governor King said that lending conditions should improve further as it “kicks in”.
UK’s manufacturing production grew more than expected in December, ending its worst quarter since 2009, signaling hope for a struggling government to avoid slipping back into recession. West Texas oil was little changed as an Energy Information Administration report showed supplies dropped at the biggest US storage hub and delivery point for the New York-traded crude. Crude slipped 2 cents after stockpiles declined 315,000 barrels last week to 51.4 million, a one-month low. The Peninsula
