It has been a very good week for the euro.
On Tuesday afternoon, the single currency was testing 1.
29 against the dollar and looking decidedly desperate.
In early London trading, the EUR is not that far away from 1.
34 and suddenly looking more solid.
Asia's highly public support for the euro and the bonds of troubled sovereigns has been very helpful, together with signs that European policy-makers are fashioning a more co-ordinated response to the debt crisis free of the open acrimony that broke out at the end of last year.
The ECB has played its part as well, buying dodgy eurozone sovereigns.
Trichet observed in his press conference yesterday that nearly all of the recent data had been stronger than expected, and that inflation may well rise further in the near term.
In addition, the dollar has lost some of its mojo this week, after a heady start to 2011, not helped by some soft claims figures on Thursday and the perception that the Fed is now the only major central bank in the world (apart from BOJ) that is fighting deflation.
The euro's sharp move higher yesterday afternoon was aided by some pronounced short-covering, in what was a vicious squeeze.
MPC needs to grasp the nettle.
Notwithstanding Thursday's decision from the MPC to leave rates on hold, there is sure to have been an animated discussion at the meeting over the fact that inflation has remained so far above the Bank's target for so long.
As many commentators, ourselves included, have been suggesting for some time now, the policy committee may find it very difficult not to raise rates in coming months because a failure to do so would risk an even greater loss of credibility than it has suffered thus far.
Also, the current stance of monetary policy is incredibly stimulatory, with base rates of just 0.
5% and inflation above 3%, so real interest rates are substantially negative.
As such, raising the base rate from 0.
5% to say 1.
0% over coming months would still render the stance of policy very accommodating, and would be very unlikely to derail the economy, notwithstanding the growth headwind from fiscal austerity.
The Bank has been wrong on inflation for far too long.
It needs to grasp the nettle, and sooner rather than later.
EU leaders explore a broader EFSF mandate.
One of the principal reasons for the euro's improved performance over recent days is the constructive discussions amongst EU officials being held in Brussels concerning possible changes to the EFSF.
According to yesterday's FT, Germany appears amenable to expanding the powers and the lending capacity of the EFSF, including a possible increase in the guarantees supplied to the vehicle.
The latter would be very controversial in Germany, where the public remain vehemently opposed to providing more aid.
For their part, Merkel's negotiators in the talks in Brussels are pushing for strong conditionality as the price for extra German assistance, including greater economic policy co-ordination within Europe.
Exactly how this would work remains to be seen.
Also under discussion is a lowering of the interest rate charged to Ireland for its bailout.
For now, the euro is drawing some comfort from the less frenetic and confrontational dialogue on the eurozone debt crisis that characterised the final few weeks of last year.
It remains to be seen whether this more conducive atmosphere actually results in a more convincing and sustainable response.
Unfortunately, we retain serious doubts.
Trichet shifts up a gear.
The main take-out from Trichet's first press conference of 2011 was the shift up in his rhetoric on inflation, the ECB head noting that risks to the inflation outlook "could move to the upside".
Although he said that the faster inflation had not changed the ECB's outlook, interest rate markets were hit by the change in tone, pricing in a greater risk of a tightening of policy later this year.
This was reflected in the 6-7bp move higher in EONIA forwards, looking at rates after September this year.
There were also concerns over his comment that the ECB "never pre-commits not to move on interest rates".
The approach is reminiscent of the period of the 2006-07 tightening cycle when Trichet would signal rate hikes in subsequent months by stating that he was "strongly vigilant".
After these words, the market would take it as read that rates would be hiked the following month, yet Trichet denied that it was ever a pre-commitment.
For 2011, beware the 'V' word! The Swissie gives up more ground.
The Swiss franc has been a big mover over the past 24 hours, with EUR/CHF climbing from 1.
27 yesterday morning to 1.
2930 in early London trading.
SNB vice-president Jordan contributed to the softness of the franc, suggesting that monetary policy was very complex at present, with rates too low for some areas of the economy.
He also stated that exporters were facing an "extremely difficult" situation and that the largest risk facing the economy was a stronger franc.
In addition, the mild easing in eurozone sovereign credit concerns in the wake of Portugal's bond auction, alongside the increased expectation that Portugal will receive a bail-out of some sort, have eased tension on that front.
The negative correlation between EUR/CHF and the eurozone sovereign CDS index has become tighter (i.
e.
more negative) of late, so this reaction fits the recent pattern.
We talked earlier in the week about the risks of SNB intervention on a sustained push towards the 1.
20 level on EUR/CHF, so it appears that the market is taking on board the signs of increased angst on the part of the SNB.
Moody's chastise the major economies over cost of social safety net.
Never knowingly late to a party, Moody's declared yesterday that France, Germany, the UK and the US needed to rein in their spending on pensions and social security over time in order to stabilise their public sector debt burdens over the long term.
Moody's was especially prescriptive with respect to the US, suggesting that the public debt interest-servicing task was high for a country with a top credit rating, and that the debt trajectory was unfavourable.
Separately, S&P claimed that a change in the sovereign debt rating for the US could not be ruled out because of the fiscal predicament.
UK GDP grew 0.
5% in Q4, say NIESR.
The National Institute of Economic and Social Research estimates that the UK economy grew by 0.
5% in the fourth quarter, a respectable performance given the rapid growth recorded during the middle two quarters of the year.
On Tuesday afternoon, the single currency was testing 1.
29 against the dollar and looking decidedly desperate.
In early London trading, the EUR is not that far away from 1.
34 and suddenly looking more solid.
Asia's highly public support for the euro and the bonds of troubled sovereigns has been very helpful, together with signs that European policy-makers are fashioning a more co-ordinated response to the debt crisis free of the open acrimony that broke out at the end of last year.
The ECB has played its part as well, buying dodgy eurozone sovereigns.
Trichet observed in his press conference yesterday that nearly all of the recent data had been stronger than expected, and that inflation may well rise further in the near term.
In addition, the dollar has lost some of its mojo this week, after a heady start to 2011, not helped by some soft claims figures on Thursday and the perception that the Fed is now the only major central bank in the world (apart from BOJ) that is fighting deflation.
The euro's sharp move higher yesterday afternoon was aided by some pronounced short-covering, in what was a vicious squeeze.
MPC needs to grasp the nettle.
Notwithstanding Thursday's decision from the MPC to leave rates on hold, there is sure to have been an animated discussion at the meeting over the fact that inflation has remained so far above the Bank's target for so long.
As many commentators, ourselves included, have been suggesting for some time now, the policy committee may find it very difficult not to raise rates in coming months because a failure to do so would risk an even greater loss of credibility than it has suffered thus far.
Also, the current stance of monetary policy is incredibly stimulatory, with base rates of just 0.
5% and inflation above 3%, so real interest rates are substantially negative.
As such, raising the base rate from 0.
5% to say 1.
0% over coming months would still render the stance of policy very accommodating, and would be very unlikely to derail the economy, notwithstanding the growth headwind from fiscal austerity.
The Bank has been wrong on inflation for far too long.
It needs to grasp the nettle, and sooner rather than later.
EU leaders explore a broader EFSF mandate.
One of the principal reasons for the euro's improved performance over recent days is the constructive discussions amongst EU officials being held in Brussels concerning possible changes to the EFSF.
According to yesterday's FT, Germany appears amenable to expanding the powers and the lending capacity of the EFSF, including a possible increase in the guarantees supplied to the vehicle.
The latter would be very controversial in Germany, where the public remain vehemently opposed to providing more aid.
For their part, Merkel's negotiators in the talks in Brussels are pushing for strong conditionality as the price for extra German assistance, including greater economic policy co-ordination within Europe.
Exactly how this would work remains to be seen.
Also under discussion is a lowering of the interest rate charged to Ireland for its bailout.
For now, the euro is drawing some comfort from the less frenetic and confrontational dialogue on the eurozone debt crisis that characterised the final few weeks of last year.
It remains to be seen whether this more conducive atmosphere actually results in a more convincing and sustainable response.
Unfortunately, we retain serious doubts.
Trichet shifts up a gear.
The main take-out from Trichet's first press conference of 2011 was the shift up in his rhetoric on inflation, the ECB head noting that risks to the inflation outlook "could move to the upside".
Although he said that the faster inflation had not changed the ECB's outlook, interest rate markets were hit by the change in tone, pricing in a greater risk of a tightening of policy later this year.
This was reflected in the 6-7bp move higher in EONIA forwards, looking at rates after September this year.
There were also concerns over his comment that the ECB "never pre-commits not to move on interest rates".
The approach is reminiscent of the period of the 2006-07 tightening cycle when Trichet would signal rate hikes in subsequent months by stating that he was "strongly vigilant".
After these words, the market would take it as read that rates would be hiked the following month, yet Trichet denied that it was ever a pre-commitment.
For 2011, beware the 'V' word! The Swissie gives up more ground.
The Swiss franc has been a big mover over the past 24 hours, with EUR/CHF climbing from 1.
27 yesterday morning to 1.
2930 in early London trading.
SNB vice-president Jordan contributed to the softness of the franc, suggesting that monetary policy was very complex at present, with rates too low for some areas of the economy.
He also stated that exporters were facing an "extremely difficult" situation and that the largest risk facing the economy was a stronger franc.
In addition, the mild easing in eurozone sovereign credit concerns in the wake of Portugal's bond auction, alongside the increased expectation that Portugal will receive a bail-out of some sort, have eased tension on that front.
The negative correlation between EUR/CHF and the eurozone sovereign CDS index has become tighter (i.
e.
more negative) of late, so this reaction fits the recent pattern.
We talked earlier in the week about the risks of SNB intervention on a sustained push towards the 1.
20 level on EUR/CHF, so it appears that the market is taking on board the signs of increased angst on the part of the SNB.
Moody's chastise the major economies over cost of social safety net.
Never knowingly late to a party, Moody's declared yesterday that France, Germany, the UK and the US needed to rein in their spending on pensions and social security over time in order to stabilise their public sector debt burdens over the long term.
Moody's was especially prescriptive with respect to the US, suggesting that the public debt interest-servicing task was high for a country with a top credit rating, and that the debt trajectory was unfavourable.
Separately, S&P claimed that a change in the sovereign debt rating for the US could not be ruled out because of the fiscal predicament.
UK GDP grew 0.
5% in Q4, say NIESR.
The National Institute of Economic and Social Research estimates that the UK economy grew by 0.
5% in the fourth quarter, a respectable performance given the rapid growth recorded during the middle two quarters of the year.
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