As expected, Bank of England officials continued with their monetary easing, reducing their central rate by half a percent to a mere 1%. In the current monetary easing cycle, the bank has cut its central rate by 475 basis points; bring it down from a high of 5.75% to a record low of only 1%.
In addition, Trichet expressed his normal reluctant nature, stating that a zero interest rate policy is not necessarily a good thing for an economy and that they intend to keep their current rates on hold. Even though the ECB Continues to lag behind the curve, by roughly a full basis point and the credit markets in Europe continue to be frozen, Trichet announced a "no change" status accompanying it with his usual statement; the economy will be closely watched and monetary cuts will be released if required.
To date the European central bank is trying to avoid reaching a zero rate policy as history has taught officials that it is not necessarily the best thing to do during an economic slowdown. The Bank of Japan carried out a zero rate policy for a 5 year period from 2001 to 2006 to try to stimulate their economy. In addition, the BOJ purchased trillions of YEN worth financial securities as they tried to flood the markets with excess liquidity- a similar situation that is happening across the globe today. Even though the policy eventually paid off, sending inflation back to a normal and healthy status, the process took much longer than anticipated, forcing their economy into chaos.
In addition to the various interest rate decisions, Friday's employment data had a major impact on the pairs as payrolls plunged by 598,000, the most since 1974, while U.S unemployment jumped to 7.6%, showing a result higher than what analysts had expected. According to the Bureau of Labor Statistics, payrolls have fallen by a 5.1% annual rate, a situation that has only occurred once in the past 50 years.
While all the data stated above had an intraday impact on the markets, they were quickly brushed aside as Obama's stimulus plan received major headlines. After months of discussions the two parties in the U.S, once again battled it out on Friday, finally reaching an agreement. Even though the agreement was based on the original $780 billion plan, excluding further aid for the auto industry, investors were happy that an agreement of some kind was finally reached. The U.S indices jumped higher on the news closing the session up by over 2.7%. On the currency market trader's spirits were immediately lifted as the various pairs formed "follow through" candles, indicating that a change in trend could be closer than previously expected.
The Week Ahead
Despite all the positive sentiment in the market, one has to remember that while Democrats and Republicans have managed to reach an agreement, the enormous stimulus package is still required to pass senate. In addition, this week should be characterized by major intraday movement due to various economic events. GDP results and inflation data should continue to show an economic slowdown in the different European economies. The GDP result from Europe is expected to show a negative fourth quarter while inflation is expected to continue in its down trend. A negative economic trend is continuously worrying bank officials, as they are trying to avoid deflation.
Deflation- A situation where the price of goods decline, due to a contracting economy.
Technical Picture
EUR/USD
Despite a hectic week the EUR/USD managed to maintain its levels, consolidating around the 1.29 area. While expectations of an improvement in the U.S are driving this pair higher, a confirmation candle is required to determine a change of the secondary trend. To date the EUR/USD has formed support above 1.28 but is yet to break trend line resistance. Bollinger bands are currently converging, which could indicate to a sharp move. Watch out for Monday's movement!
GBP/USD
After breaking resistance at the beginning of the week, the Pound gained momentum climbing higher throughout the whole week. The Pound Dollar pair is currently located at trend line resistance which could prevent an immediate break. Expectations that previous rate cuts in the U.K are beginning to work are now driving this pair higher. In addition, investors are hoping that the rate cuts are coming close to an end. One should note that in addition to trend line resistance Relative strength indicators are approaching areas that were previously considered to be over bought.
USD/JPY
Major action was witnessed on Thursday as the Dollar increased significantly against the Japanese Yen. In addition the price pattern continued on Friday despite a horrifying unemployment result from the U.S. To date this pair has touched target 1 and is showing signs of a continuation. Price pattern is currently breaking out of its Bollinger bands on the daily chart and should be observed in case of a "false".
