There was plenty of action on currency markets yesterday and more is promised for today. The pound got a lift yesterday from a higher than expected growth rate for the third quarter in Britain. And the euro could be in for some moves today with the European Central Bank giving an update on how it intends to proceed with its policy measures.
Peter O'Flanagan, head of trading with Clear Treasury in London, said the pound rallied by as much as 1% yesterday when new data showed the economy growing by 0.4% between July and September. "The UK is still a laggard among the G7 economies. It's still underperforming but the GDP figure opens the prospect that the Bank of England will have more leeway to address interest rates. The primary concern is inflation which is running at around 3%."
Mr O'Flanagan said a rate hike was largely priced in by market traders but the pound was still off the highs it had registered in recent months with the Brexit negotiations anything but clear.
Meanwhile, the euro is expected to be in the spotlight today as the ECB policy committee meets. "We've seen the euro rally over 12% against the dollar and it's up 5 or 6% from the lows against sterling. The ECB has been buying €60 billion of bonds every month and that was scheduled to run to the end of December. We expect to see the programme enter into next year, but at a smaller level. The market is expecting tapering to €30 billion a month for nine months. A lot of that has been priced into the euro."
Peter O'Flanagan said analysts were looking at asset purchases next year in the range of €240 billion to €270 billion. "Anything in excess of that will likely see the euro weaken significantly," he concluded.
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