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Foreign Exchange Markets Await Central Bank Decisions

According to the ECB, the recovery in global markets is continuing, their predictions have been revised up and their debt levels are coming down. Then on the other hand they have extended their loan guarantee scheme to an unlimited level which basically means that there cannot be any possibility of a default from any member state because they can just approach the central bank and get more Euros.

If this is the case then why does the Euro still remain weak and sinking lower by the day, its hit a 7 year low against the Swiss Franc and keeps creeping lower against the Dollar.
Against the Yen it has recovered marginally but still remains at a very low level in comparison to previous years.

Could it be because the foreign exchange market doesn’t trust the data being published, could it be that the stress tests were fixed in the EU’s favour and that they didn’t really test anything other than the ability to fix the result.

One thing is for certain, the markets will be watching Jean Claude Trichet this afternoon with bated breath, hanging on his every word for a clue to future currency policy.

According to analysts the rising bond spreads of Europe reflect investor jitters about a deteriorating global economy and ongoing fears about euro zone debt levels.

“The market is starting to question again the solidity of growth in Europe and there is a search for a safe haven,” said RBS economist Silvio Peruzzo.

“Given that we don’t exactly know which banks need ECB funding, this has overall implications for the banking system in the weak countries, as well as for government bonds. This will take a while to get sorted.”

The Bank of England’s Monetary Policy Committee is likely to keep rates on hold at the end of its meeting today, but with economic growth set to ease, economists say it may yet increase its bond-buying program and from previous experience this can compound to weaken the pounds currency exchange rate across the board.

The U.K. economy posted its strongest rate of expansion in nine years in the second quarter, but economists fear that that performance won’t be sustained as recent surveys have pointed to a slowing in activity.

MPC member Andrew Sentance’s persistent votes for an increase in the key interest rate over the last three meetings have raised expectations that the central bank would soon tighten its monetary policy and follow Canada’s rise yesterday to 1% path is being forged and the pound might follow.

“With the BoE already dovish, it will be difficult for them to change their stance anytime soon.”

A leading UK think tank said on yesterday economic growth slowed sharply to 0.7% in the three months to August from 1.3 percent in the three months to July, it looks set to weaken further during the remainder of 2010 and into the first quarter of 2011.

The impact of GDP on the pound in pronounced due to the high levels of debt and the precarious nature of our sovereign credit rating. Unlike the European central bank the Bank of England doesn’t have the German economy to bail them out.

It remains a fact that foreign currency exchange markets will be reasonably volatile this afternoon as traders adjust their longer term projections in line with central bank rhetoric. Corporate transfers can also play a part. The interest rate swap plays a very big part in corporate finance and that is affected a great deal by central bank activity, exchange rate volatility can be controlled by proper planning. Get in touch with a professional foreign exchange broker to mitigate your risk.