Currency markets were thrown into reverse during the European Central Bank’s press conference, as Jean-Claude Trichet sounded a less than hawkish note, suggesting that current monetary policy remains appropriate. Prior to the press conference investors had been bringing forward their view on when the ECB might raise interest rates. Mr Trichet’s comments clashed with Fed’s Bernanke’s more optimistic view of the US economy and the jobs market. The contrasting positions seen by the two men saw currency markets reverse their stance, which bolstered the US dollar. Safe haven flows also became a factor as geopolitical tensions continued to flare in Egypt. The escalating violence will continue to lend support to safe haven currencies such as the franc, yen and US dollar. Sterling saw a remarkable day making sharp gains against the euro, while also managing a three month high against the US dollar.
Sterling
Sterling was able to outperform the euro against the US dollar, which helped sterling make large gains against the single currency. The PMI service sector survey rose to 54.5, which like the construction PMI seen earlier in the week, surprised markets to the upside of expectations.
US dollar
Currency markets were turned on their head as up until the ECB press conference. The about face taken on the eurozone interest rate outlook, combined with Federal reserve Chief Fred Bernanke’s more encouraging comments on the US economy, helped to pull the dollar off its recent lows. Not only did the outlook for interest rate differentials shift late in the afternoon, but also there was a safe haven element that played into the dollar’s rise, with protests in Egypt continuing and some demonstrations turning violent.
Euro
The euro suffered heavy losses across the board after ECB’s Trichet said that monetary policy was “appropriate” and that the outlook for inflation was for a rise above the central bank’s two per cent throughout the rest of the year, but that the rate would moderate in the medium or policy relevant period. The less than hawkish comments turned currency markets around.
Japanese yen
The Japanese yen found support via safe haven flows. The currency continues to be dominated by external factors. With Chinese volumes low trading has been thin. Next week Japan will close on Friday for a public holiday. The holiday schedule in China and Japan could prevent the currency from moving outside of recent ranges anytime soon.
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