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FX Day Trading - 8 September 2011
Monetary policy decisions today
Will the ECB call a halt to rate hikes?
Will Posen find support for more QE?
The Dutch government has come up with a new way to sort out the euro.
The Financial Times reports that Prime Minister Mark Rutte would like to see a new EU "commissioner for budgetary discipline". This enforcer "could ultimately adjudicate whether countries should be kicked out of the euro" if they failed to comply with the standards for deficit and debt set out in the Stability and Growth Pact.
Were the proposed Budget Tsar to be in office today he would have a rich hunting ground but might end up culling the wrong stock. Nine of the euro's 17 members, including Germany and France, fall at one hurdle or another and so would be targets for expulsion. Spain and Ireland, on the other hand, are compliant and therefore bomb-proof.
Unlike the pound and the euro itself. both face possible setbacks today after the Bank of England and the European Central Bank announce their latest policy decisions.
For several months the ECB has been fostering expectation that it will take its benchmark Refinancing Rate higher.
It has raised it twice so far, in April and July, and indicated a month ago that another increase was in the pipeline when Jean-Claude Trichet said he would "monitor very closely" upward pressure on prices.
The latest Euroland inflation figure was 2.5%, above its "2% or lower" target, so in theory the Governing Council will still be minded to raise rates when it meets this morning. There is speculation, however, that the ECB might decide that sluggish growth will lead to falling inflation and that there is no need to take the refinancing rate beyond its current 1.5% level.
If M Trichet is still monitoring inflation "very closely" this afternoon or, better still, is "vigilant", it is still game on for another rate increase and the euro should prosper. If the "very" has disappeared or the current interest rate is "appropriate" the prospect of an increase will fade and the euro - dollar spread betting market could find itself under pressure.
The game in London has nothing to do with the Bank Rate; most FX spread betting investors are steeled for it to remain at 0.5% for a third – and maybe even a fourth – year.
The question is whether or not the Monetary Policy Committee will embark on a second round of quantitative easing or, as the Bank prefers to describe its money-printing activities, "asset purchases".
MPC member Adam Posen has been voting for more QE since October last year and will doubtless do the same today. He wrote at the end of last month that "It is ... past time to stop fearing inflationary ghosts. There is no credible threat of sustained higher inflation in the advanced economies that should restrain central bank action”.
Until now he has been a lone voice, but there was a change of balance on the committee last month when two members stopped voting for a rate increase. Whilst it is unlikely that the MPC will wheel out another £50 billion of asset purchases today, the minutes in two weeks' time could possibly show new allies for Mr Posen.
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'Euro Dollar Spread Betting Market Under Pressure Ahead of ECB Rate Decision', Article by Moneycorp, last update: 8-Sep-11
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