A solid job report showing that US private employers added a larger-than-expected 198 000 jobs in February, gave the dollar a strong boost yesterday, trading at its highest level against a basket of currencies in 6-1/2 months. Both the Euro and Pound sterling (GBP)are under strong downward pressure. Euro/USD dipped below 1.30 and trades at 1.2990 prior to meeting in the ECB, European Central Bank, later today. GBPUSD traded below the critical 1.50 level on rumours on monetary easing.
While the job data fuelled hopes that the US economy is improving, the British pound fell to its lowest level in 2-1/2-year as market players positioned for more stimulus from the Bank of England (BOE). The strict austerity measures introduced by the British government over the last two years have not been working, and the UK economy is facing the threat of triple-dip recession. While BOE and other central banks are considering the same monetary easing policies as the US FED has practised, US is debating whether to exit their bond buying program.
After the dollar index, DXY, hit, a bottom level of 78,918, in the beginning of February it has rallied 4 % since. The stronger employment data along with better housing figures are likely to fuel speculation that FED will end its bond buying program sooner than expected in spite of FED Chairman, Ben Bernanke’s strong statement to the contrary only weeks ago.
Of the three major Western central banks; ECB, BOE and FED, BOE is the most likely to act in favour of more easing. Three of BOE’s members voted in favour of quantitative easing last month. It is expected that a majority this week will opt for a moderate 25-billion-pound balance sheet expansion. That would put sterling under further strong pressure. ECB meets in Frankfurt today on the backdrop of a political deadlock in Italy and prospects for a further fall in the Euro. It is, however, expected that ECB will keep its policies unchanged.
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