The euro fell through key technical support levels to its lowest point against sterling in more than a year after data on eurozone unemployment and inflation this week failed to rule out the chances of further monetary easing. The European Central Bank will make its first decision of 2014 on interest rates and should President Mario Draghi discuss options for more stimulus, the euro could suffer further losses. Pressure on the Bank of England is very different ahead of its policy announcement, with some in the market concerned that Governor Mark Carney may have to release a rare policy statement to reign in expectations about rate hikes and weaken the sterling exchange rate. The US dollar edged slightly lower and could weaken sharply if key US jobs data disappoints.
Sterling
The pound shot to its strongest level in more than a year against the euro and climbed against the US dollar as speculation continues as to whether or not the Bank of England will have to hike interest rates before schedule while the European Central bank is unlikely to rule out further rate cuts. The BoE will also be making its decision on monetary policy as optimism gathers pace that Britain’s economic recovery will outpace its rivals this year. However, speculation about rate hikes could drive up borrowing rates too soon and undermine the economy’s recovery, a problem which could force the central bank to release a surprise policy statement.
US dollar
The US dollar edged slightly lower and could weaken sharply if US jobs data disappoints after minutes from the Federal Reserve implied that although US central bankers were cutting stimulus because of a strengthening economy, they are also cutting because quantitative easing was now having less of an impact. What this could mean is that as the Fed continues to taper its monthly bond buying, it could do much more to strengthen its forward guidance on interest rates to help stimulate the economy.
Euro
The ECB is set to announce its first policy decision of the year in which it may leave the door wide open to further monetary easing in the months ahead. No tinkering is expected this time but Draghi’s press conference could suggest that officials may be compelled to take new easing steps before long, given the stiff headwinds of high unemployment and low inflation on the 18-member economy. No change in mood from the ECB could see the euro rally after the single currency fell to a one-month low against the US dollar and to its lowest in a year against sterling.