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The forex markets remain volatile today, as the Canadian dollar and euro have shot higher while the British pound has been the weakest of the majors, following rate decisions from their respective central banks.
Bank of England - The BOE left rates at 0.50 percent once again, as expected, and comments within the central bank's policy statement was straight-forward. Indeed, the statement simply reiterated that the Monetary Policy Committee (MPC) would its £125 billion asset purchase program, to be financed by the issuance of central bank reserves. The MPC also said that it will take another two months to complete the program, and its scale will be kept under review. All told, there was nothing surprising here and certainly nothing to suggest that the BOE's policy bias has changed in any way, shape, or form. Accordingly, GBP/USD hardly moved upon the ECB's 7:00 ET rate decision, as you can see in the 10-minute chart below, while the sharp drop at 8:00 ET was generally attributed to rumors that UK PM Gordon Brown was preparing to resign.
Brown's spokesman has denied the rumor, calling it complete nonsense, but the move helped take daily RSI down from overbought levels:
Related Article: Check out our Monthly British Pound US Dollar Exchange Rate Forecast
European Central Bank - The release of the ECB's rate decision to leave rates unchanged at 1 percent at 7:45 ET initially weighed on EUR/USD, as Credit Suisse overnight index swaps had actually been pricing in a 62 percent chance of a 25 basis point hike as of Wednesday. However, ECB President Jean-Claude Trichet's subsequent press conference at 8:30 ET proved to offer some support for the euro, as EUR/USD gradually climbed higher thereafter. In his comments, Trichet called current rates appropriate and said that recent data suggest that the Euro-zone recession may have bottomed during the previous two quarters, and that economic activity over the remainder of this year is expected to decline at much less negative rates, with quarterly GDP likely to rise into positive territory by mid-2010. On the inflation front, annual CPI growth is projected to decline further and temporarily remain negative over the coming months, before returning to positive territory by the end of 2009.
During the Q&A session, Trichet said that rates aren't necessarily at their lowest level, suggesting there may be room for additional rate cuts. He also went on to say that the ECB will begin their 60 billion euro covered bond purchasing program in July, and that the central bank plans to fully implement the purchases by June 2010. The ECB will buy bonds directly in the primary and secondary markets, the issues are required to be at least 500 million euros in size, and bonds can be linked to assets from either private or public entities. The credit easing program is relatively small compared to those implemented in the UK and US, and Trichet refused to comment on any eventual expansion of the program.
Related Article: Check out our Monthly Euro US Dollar Exchange Rate Forecast
Bank of Canada - The BOC also left their overnight rate target unchanged at a record low of 0.25 percent today at 9:00 ET, and reiterated their plan to hold their target rate in place through June 2010. The central bank's policy statement was relatively optimistic and didn't touch upon quantitative easing, which was first brought up in their April Monetary Policy Report. The Bank said that financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly, and while macroeconomic risks are roughly balanced, they believe that overall risks to its inflation projection remain tilted slightly to the downside. All told, the Canadian dollar
was able to gain against the US dollar as Canada's fundamental outlook seems to be much better than that of its neighbor to the south.
Related Article: Check out our Monthly US Dollar Canadian Dollar Exchange Rate Forecast
Written by Terri Belkas, Currency Strategist of DailyFX.com