Will the ECB lend covered loans to financial institutions?

The Euro rose 0.64% to $1.36938 against the US Dollar yesterday as Greece unveiled a new austerity package. Since news broke of Greece’s 300bn Euro debt, the single European currency in the forex online market has been tumbling against its major counterparts – striking a 10 month low against the dollar, this past Tuesday.

Yesterday the Greek government unveiled an austerity package worth 4.8bn Euros -a host of tax increases and spending cutbacks. Greek government officials hoped this will bolster the Euro in international markets and convince European leaders that they are doing enough to merit a possible bailout.

Retail Sales in the 16 country zone slipped in January, raising new concerns about the strength of the area’s economic recovery. According to Eurostat, sales volume within the Euro Zone fell 0.3% from December and was 1.3% lower than in January 2009. While the monthly drop in sales was weaker then the market expectations of -0.5%, economists warned that sales could continue to fall in February.

The weakness of this data cemented expectations that the European Central Bank will keep its benchmark interest unchanged at its current record low level of 1.0% (announced later today at 1245GMT). The announcement will be followed by a press conference and there is speculation that the ECB may announce that it will lend covered bonds to financial institutions as part of a strategy to increase collateral. The press conference will be closely watched by traders as it has the potential to cause huge volatility in the market due to the off the cuff format.

Across the Channel the British Pound rose across the board, appreciated against 13 out its 16 major currency counterparts – including gaining a record 0.89% against the USD, to close at $1.50959. This abrupt increase came after the Services PMI unexpectedly jumped to 58.4 from 54.5 in January. The UK dominant services sector expanded sharply to more-than-a-three-year high in February, boosted by strong new orders and business activity- adding evidence that the first-quarter GDP grew at a faster pace than in the final three months of 2009. According to senior economists at the Markit, this latest piece of data highlights the underlying trend that in the private sector remains positive, and is on course to deliver a quarterly expansion above 1.0% in the first quarter. According to economists, this positive survey will reinforce the expectation that the Bank of England's Monetary Policy Committee (MPC) will not be extending its £200bn quantitative easing (QE) program (1200GMT).

At noon today, the BoE will announce whether or not it will raise its benchmark rate from its record low level of 0.5%. Analysts predict that the central bank is unlikely to raise change interest rates, as any raise in the cost of borrowing could jeopardize the country’s fragile economic recovery.

In Anticipation of BOE and ECB's rate decission

Early this morning, Germany released its monthly retail sales report. Despite a predicted drop of 0.5%, retail sales were unexpectedly stable for January, while December gains were revised upwards modestly- fueling hopes that consumer supported recovery may emerge within the coming months. This will be followed by the publication of the entire Euro Zone’s monthly retail sales for January, predicted to show a decrease of 0.3% from the previous month. With no other important news coming out for the rest of the day, investors will turn their attention to tomorrow’s impeding ECB rate announcement. Once again, Jean-Claude Trichet, president of the ECB, is expected to maintain the minimum bid rate at its current record low level of 1.0%.

The ECB’s rate decision will be preceded the Bank of England’s announcement of its overnight rate. The BoE is expected to keep its key lending rate at its current record low level, despite signs that Britain is emerging from the recession at a faster pace than previously anticipated. While the country’s GDP may have grown 0.3% (revised) for the fourth quarter of last year, analysts predict that it is highly unlikely that the central bank will opt to exit its “easy” monetary policy so quickly.

Yesterday, the Sterling plunged to a new 10 month low against the greenback in the forex online market as speculation continued to increase that neither the Labor nor the Conservative party would win an outright majority in Parliament in the coming June election- obstructing efforts to cut the country’s historically high budget deficit. After slipping 1.045% on Monday (at one point diving a record 3% to a $1.4784, its lowest level since April 2009), the GBP continued to fall against its American counterpart yesterday – deprecating an additional 0.2314%, to close at $1.49607.

Despite increasing chances of a “hung” parliament in addition to a plummeting currency, U.K consumer confidence jumped in February to a two-year high. The index of consumer sentiment increased 6 points from the previous month, to a new level of 80.

Yesterday, the U.K released its construction PMI, showing a fall from its previous level of 48.6 to 48.5 (a number greater than 50.0 indicates expansion, while number below shows contraction). Early this morning (930GMT), the U.K will release its Service PMI- while this report is the last PMI for the week, it is the most important. The service sector, which includes the financial sector, was improving up until last month. After falling to 54.5, analysts predict a slight increase of 0.5 points this month, to a new level of 55.0.

The U.S dollar weakened across the board, falling against 15 of its 16 major currency counterparts, following the release of the Bank of Dallas Fed Chairman’s statement that borrowing costs should continue to remain low until the economy picks up- which according to him “won’t happen for some time”.

Later today (1315GMT), the U.S will release its ADP Non-Farm Employment Change. While generally considered a predictive index for Friday’s highly anticipated Change in Non-Farm Payrolls, the ADP is expected to show a drop of 15K. With Payrolls have declined in 24 out of the past 25 months and economists are predicting another decline of 40,000 in February.

The Pound is tumbling down against the Greenback

After a relatively slow end to last month, the forex online market is set to be hit with a fresh wave of volatility within the next few days, as the month of March kicks off with four central bank’s rate announcements.

Yesterday the Canadian Dollar surged against its American counterpart, on the back of higher than anticipated GDP. The GDP beat expectations and rose by an annualized 4.0% in the fourth quarter of last year fueled by an increase in retail sales, consumer spending, exports and robust housing sector. The USD/CAD plummeted from a session highs of 1.0575 to hit a new session low of 1.0475. The loonie appreciated a total of 1.04% yesterday against its U.S counterpart, to close at $1.04106.

Across the Atlantic, the pound tumbled to a new 10 month low as fears continue to grow that the UK will have a hung parliament. The currency fell 1.6% against the greenback, dropping below the $1.5 mark, for first time since May, as the Labor party’s majority narrows. The Pound suffered across the board sliding to its lowest level against the Euro since early last December, as well as hit a one-year low against the Japanese Yen of 132.07 and plumbed its weakest in 25 years against the high-yielding Australian Dollar.

Despite a better than expected manufacturing PMI, the Pound brushed the news that the manufacturing sector remained at its previously reported 15 year high of 56.6. Out later today, the construction PMI is predicted to show to that house price have continued to rise in the last seven months, however, the rate of increase is expected to have slowed from 0.6% in January to 0.3% in February.