Central bank decisions dominate forex market

The outcomes from the latest rate meetings of the European Central Bank and the Bank of England were the same, but have seen their respective currencies moving in opposite directions.

Sometimes with the financial markets, expectation is everything.

Heading into the Bank of England’s monthly MPC meeting, a decision to maintain the official Bank Rate paid on commercial bank reserves at 0.5% was widely-expected and those expectations were right on the money, with the central bank keeping the rate where it has been held since early 2009.

This wasn’t hard to predict: the MPC had previously issued explicit guidance saying the rate would be kept at 0.5% until unemployment falls below 7%, barring big fluctuations in inflation or other threats to financial stability.

That all said, economic data has of late been painting a picture of a recovery being underway in the UK, with George Osborne saying in his Autumn Statement that the UK is growing faster than any other major economy (his forecast of 1.4% for 2013 is clearly not faster than the 3.6% reported today for the US in Q3, but never mind) and predicting growth to improve to 2.4% next year.

That may have led some to believe that despite the BoE’s forward guidance, there was some outlier chance of a rate hike today, which could explain why sterling has sold off today. By mid-afternoon in New York, cable was trading down 0.3% at 1.6332.

No one really expected the ECB to announce a change either, but the outlier expectations were the other way round for the euro.

The ECB has shown itself to be conservative in action in the past, and so two cuts in a row would have been unlikely, but there had been some small speculation that the ECB might be amenable to experimenting with the dark arts of negative interest rates.

Although Mario Draghi struck a dovish tone in his post-decision press conference, his re-iteration of existing forward guidance provided no fresh ammunition to those gambling on additional monetary easing. That has helped support the euro today, with EUR/USD bouncing 0.6% to 1.3675.

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