Today is a big day for financial markets as both the Bank of England and the European Central Bank announce their plans for monetary policy in December.
The BoE decision is unlikely to throw up any surprises; the strength of the UK economy at the moment ensures that policymakers will not opt to increase the £375 billion asset purchasing target and the 7.6% Unemployment Rate confirms that the benchmark interest rate will remain at the current record-low of 0.50% – the Bank of England has previously stated that interest rates will not be raised until Unemployment falls below 7.0%.
The ECB decision, on the other hand, will likely have a much larger impact on financial markets and, in particular, the Pound to Euro exchange rate (GBP/EUR).
October’s decline in Eurozone CPI inflation to 0.7% caused the ECB to reduce its benchmark interest rate to a new all-time low of 0.25% in attempt to stop deflation kicking in. The Consumer Price Index rose back up to 0.9% during November, and for this reason the majority of investors do not expect the ECB to reduce rates again this time out.
ECB Policymakers have spoken about the possibility of negative deposit rates, or even a QE-style bond-buying scheme to help drive inflation higher, but neither of these options are expected to be explored this afternoon either.
However, there is a moderate chance that, during his post-decision press conference, ECB Chief Mario Draghi will talk-up the possibility of further non-standard measures to help pave the way for additional monetary easing in the New Year. Any mention of rate cuts, negative deposit rates or bond-buying is likely to have a protracted negative impact on the Euro. GBP/EUR currently stands around half a cent below 1.2100 and could easily reach a fresh 11-month high if Draghi strikes a dovish tone.
Sterling remained in relatively close contact with the single currency yesterday as a softer-than-anticipated UK Services PMI result of 60.0 hurt the Pound during the morning. However, during the afternoon Sterling clawed back its losses in response to comments from Standard & Poor’s, suggesting that the UK’s credit rating could have its negative outlook upgraded to stable. S&P’s currently rates Britain as AAA.
Economic news out of the Eurozone did little to support the single currency as Retail Sales declined by -0.1%, compared to forecasts of +1.0% growth, and Q3 GDP was confirmed at a tepid +0.1%. Services output in the currency bloc printed at 51.7, but disappointing contractions in France and Italy took the gloss off the mildly encouraging result.
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