Transfer Euros Abroad: EUR Currency Continues to Fall

A busy news day encompassing the monthly policy decision from both the Bank of England (BoE) and European Central Bank (ECB) and the first testimony from Bank of England Governor-designate Mark Carnet before the Treasury Select Committee saw the euro continue to come off its recent fifteen month high’s against both the pound and the dollar.

In the UK, as expected the BoE’s Monetary Policy Committee (MPC) voted to maintain both the key base rate and size of its Quantitative Easing budget unchanged at 0.5% and £375 billion respectively.

The BoE followed up with the release of a detailed statement outlining its current policy stance. The paper shows it believes that the UK economy is set for a slow but sustained recovery in both demand and effective supply. It also points out the fact that “looking through the influence of temporary factors, overall output appears to have been broadly flat. In large part that reflects sharp falls in particular sectors of the economy that are unlikely to be repeated in 2013. In contrast, the combined output of the manufacturing and services sectors has grown modestly.”

Economists at Barclays Research pointed out that “This statement highlights the acute dilemma faced by the MPC. The weak activity outlook begs for more stimulus, but the inflation outlook is not sufficiently benign to make the committee comfortable expanding policy further. Assuming the recovery does take hold – and the early indications for the first quarter are promising on this front – we would not expect the MPC to sanction more stimulus, but the debate remains live.”

The ECB also announced a ‘no change’ decision but fell heavily after ECB Head Mario Draghi made specific reference to the recent rise in the value of the euro. While Draghi said the rise stems from fresh confidence in the euro zone, he also noted inflationary risks, increasing expectations of a rate cut in the months ahead.

Draghi also said that he expected economic activity in the euro zone should gradually recover in 2013 but added a cautionary note, saying that there were more negative risks than positive.

Overnight, Europe's leaders are negotiating a possible cut to the European Union's budget for the first time in its 56 year history following a major victory for David Cameron. Proposals tabled early on Friday morning for Brussels budgets for the period 2014 to 2020 would slash the EU's spending by £30 billion between 2014 and 2020 compared to current levels of spending. The historic cuts package tabled by Herman Van Rompuy, the EU president, after a bitter battle between the Prime Minister and Francois Hollande, the French President, could save the British taxpayer up to £500 million a year it is claimed.

A measure of risk appetite returned to the market in the Far east markets after stronger than expected data from china. The Chinese trade surplus decreased less than expected during the month of January, reaching a level of $29.2 billion versus the previous month’s level of $31.6 billion. Exports grew at a 25% year-on-year rate during the month of January while imports did so by 28.8%.

Analysts at Nomura commented that these strong export numbers cannot be fully explained by the Chinese New Year effect alone. The Chinese New Year fell in January last year but occurs in February this year but rather, the data suggests that external and domestic demand are both strong.