TRADERS´ Blogs

The markets’ faith that an economic recovery is taking hold, the Eurozone crisis is behind us and central banks will continue to be a benign liquidity force has been shaken this week. Volatility has risen, stock markets have fallen and the dollar is poised to get its groove back.  However, as we end the week expectations that the Fed will abruptly end QE3 are being scaled back and the focus is shifting back to Europe’s growing list of woes.

It’s been a fairly quiet start to the week as the US is out on a public holiday and the G20 ended up being fairly uneventful. The communique said nothing remotely controversial – Japan was not mentioned by name and although the most powerful nations in the world spent a lot of time talking about currencies, they didn’t say anything that is likely to dramatically alter the FX landscape. However, don’t be fooled, there is a lot going on this week so watch out.

• Currency wars take centre stage  

• Why the pound is a headache for the BOE

There have been plenty of false starts when it comes to calling for a stronger dollar and the dollar index is currently close to its lowest ever levels. Although there have been bouts of strength in the greenback, particularly during periods of financial market stress, the dollar index is currently around the middle of its 5-year range, but could the tides be turning and can the dollar embark on a multi-year, broad-based strengthening?

Mario Draghi, the President of the ECB, said very clearly yesterday that currency intervention is bad, the market should set interest rates and that the ECB doesn’t have the mandate to control the single currency. Yet, since his press conference yesterday afternoon the euro is down by more than 1%.  Can Draghi do for the euro what he has so far been able to do for Spanish and Italian bond yields?

The Governor-elect of the Bank of England Mark Carney has been testifying to the UK Treasury Select Committee this morning and so far his testimony suggests he will be a pragmatic Governor, who won’t adopt radical changes at the Bank, but will implement subtle changes that could impact how policy decisions are made in the years ahead.

On Thursday 7^th February, the ECB is scheduled to announce its latest interest rate decision. The decision will be released at 1245 GMT/ 0745 ET. No change in interest rates or additional policy measures is expected. At 1330 GMT/ 0830 ET, the ECB President Mario Draghi will hold his monthly press conference to explain the Bank’s decision.

It’s been a quiet session as the markets lead up to ECB meeting. Major markets are stuck in ranges and stocks are lower. This has allowed the markets to focus on news events. Firstly, the tittle tattle between currency bloc members about whether the euro is overvalued or undervalued has heightened event risk for the single currency as we lead up to the ECB meeting tomorrow. The news that Berlusconi is rapidly catching up with the leading centre-left party as we approach the Italian elections in a few weeks has focused minds on Italy’s precarious financial position. Added to this, more UK banks have been embroiled in the Libor-rigging scandal and majority state-owned RBS was fined GBP390 million for manipulation in yen and Swiss franc Libor rates.

The ECB has kept a respectable silence, the German finance minister was shot down by Chancellor Merkel when he dared to mention the Japanese exchange rate, however two days before this month’s ECB meeting and the French President Francois Hollande has waded straight into the debate.

The ECB has kept a respectable silence, the German finance minister was shot down by Chancellor Merkel when he dared to mention the Japanese exchange rate, however two days before this month’s ECB meeting and the French President Francois Hollande has waded straight into the debate.