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ECB and BoE rate decisions

ECB and BoE rate decisions

The Dollar lost ground against Sterling and the Euro after poor economic data led to concerns about the US economic recovery. US ISM Non Manufacturing came in at 52.8 well below expectations of 57.3. The ADP unemployment figure also came in below expectation with a gain 179,000 private sector jobs, it is thought that a figure closer to 300,000 is needed to make a significant impact on US unemployment. Both of these figures raise concerns about the rate of recovery in the US.

However, data was also poor in the UK and Euro zone. The UK PMI construction figures came in significantly below forecast and increased worries about this sector, after, the reported 4.7% decline in this sector seen in Q1 GDP last week. Much of the fall in this sector is believed to be down to the removal of government spending which is likely to continue for the rest of the year. This reading continued the worrying trend of poor data releases seen in the UK since last week’s Q1 GDP, raising questions about the economic recovery in the UK. In the Euro zone, retail sales showed an alarming drop of 1.7%.

In the past, poor economic reading’s in the US, Europe and the UK would have led to dollar strength as investors looked for safe haven buying. However, at the moment the markets are fully focused on the different interest rate expectations between the three economies.

Today sees the interest rate decisions for the ECB and MPC, both central banks are expected to leave rates on hold. However, there is a growing suspicion that the ECB may be looking to raise rates again as early as June. During the post meeting conference the phrase “strong vigilance” will be looked for as a signal of a June rate hike, if this phrase is left out then this might lead to some short term Euro weakness. My personal point of view is that it would seem too early to signal a second rate hike when the effects of the first one are still to filter their way in to economic readings.

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