EU announces government bond-buying programme

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 27th January 2015 17:52 EST

Separate data showed wage growth in the three months through November was less than analysts estimated. However, with wage growth at 1.7% year on year and inflation at 0.5% year on year, in real terms the general public is better off and has more disposable income. The Monetary Policy Committee also forecast that U.K. inflation will drop to zero in the first quarter and there’s a roughly equal chance that it could fall lower.

The U.K. unemployment rate also declined to a six-year low of 5.8 percent from 6 percent. Analysts had forecast a drop to 5.9

The consumer price inflation dropped to the joint record low of 0.5% in December, driven down primarily by cheaper fuels and food, and is expected to fall below zero in early 2015. Despite the expectations of slower sales in the run-up to Christmas, significantly low inflation in the UK is seen as still helping boost consumer appetite. Retail sales volumes soared above estimates between October and November and year-on-year sales posted the biggest rise since May 2004, as the new phenomenon of 'Black Friday' - the day following Thanksgiving Day in the United States - helped bolster sales in November.
Investors responded to Mario Draghi's plan to stoke the Euro zone economy by selling the euro, which pushed the pound to a seven-year high against the Euro. However, the action could prove a mixed blessing for the UK. The weakening euro raises the prospect of cheaper foreign holidays for Britons, but a tougher climate for the UK's exporters.

The safe haven Dollar strengthened last week off the back of market uncertainty, despite disappointing jobs figures for the US. More Americans than forecast filed applications for unemployment benefits last week, a sign of lingering holiday turnover. Holiday staffing needs create swings in employment, making it difficult for the government to seasonally adjust its weekly data this time of year. Employment is likely to keep growing as the world’s largest economy shows signs its sustaining momentum amid a global slowdown.

The Eurozone was the main focus of the market last week in the lead up to the QE decision. Analysts were speculating the ECB would announce a €600bn sovereign bond buying programme to potentially try and recover the Euro and aim to bring inflation back up to the central bank’s target 2% ceiling. There were gains shown in the EUR with the build-up to Thursday’s decision; however The Euro suffered significant losses during Thursday’s session, most notably against the Dollar where the single currency fell to an 11 year low, dropping 1.2 per cent.

The move came after European Central Bank (ECB) president Mario Draghi announced a €60bn-a-month government bond-buying programme - much higher than the expected €50bn a month until the end of September 2016, meaning the programme will total €1.26 trillion Euros. With its main interest rate at just 0.05 per cent Draghi had a limited arsenal of weapons to counter inflationary pressures, after the Eurozone slipped into deflation in December for the first time since 2009, with a 0.2 per cent year-on-year fall in prices.

Over the weekend it was confirmed that radical far left political party Syriza have won the Greek general election. The party strongly oppose the austerity forced upon their nation by the EU to ensure they repay their crippling debt. This weakened off the Euro significantly in Asian trading as this sparked fears that the new Greek government will threaten to default on their debts and destabilise the Euro.

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