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No QE3 mentioned – USD strengthens

No QE3 mentioned – USD strengthens

FOMC March minutes supported the USD. Markets were disappointed not to see any mention of further quantitative easing, as a result USD strengthened with GBP/USD falling from 1.60+ to below 1.59.

The ECB Governing Council meets in Frankfurt today, rather than the usual Thursday. Although  many would suggest that the ECB should cut rates below 1%, in the short-term the ECB looks to be adding liquidity to markets and using LTROs for easing rather than any reduction in the cost of funding.

Prior to that Eurozone service sector PMIs are likely to show that activity contracted in Q1, although we have hopes that stronger domestic demand will keep Germany in expansion mode. The Italian government is also due to publish its Deficit to GDP ratio for the fourth quarter. The Q1 2012 cash budget showed a decline of €3 billion to €28.2 billion due entirely to better receipts in March. But declining growth means that the government has to find further austerity measures to ensure that it meets its deficit target. With the government committed to eliminate its budget deficit by 2013 any progress from Q3’s 4.3% deficit will help avoid further austerity measures.

Closer to home, the market is looking for UK service sector activity to grow more slowly in March. Consensus looks for the headline PMI index to ease from 53.8 to 53.4. Given that February suffered from very cold weather this seems rather strange and we would not be surprised to see a stronger outturn with the index remaining unchanged or even rising.

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