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Euro and pound drop on central bank comments

The EUR fell like a stone as Mario Draghi and the ECB made the historic step of changing its communication style.

All trading involves risk. Losses can exceed deposits.

The bank suggested it will ‘leave the key interest rates at present or lower levels for an extended period of time’, thus adopting forward guidance and turning its back on previous calls that it would always look at policy meeting by meeting. This is key and is clearly aimed at moves in the bond market. It also signalled that it is still looking closely at a refinancing rate cut, while keeping an open mind on negative rates. EUR/USD fell to a low of 1.2883 on the back of this statement; however the pair has rebounded, reclaiming the 1.29 handle.

Like EUR/USD, cable fell heavily as the BoE gave forward guidance for the first time in its history, again pushing back on the sharp moves in the bond market. GBP/USD fell to 1.4065 on the back of this change in stance, with GBP falling hard against other G10 currencies. Higher yields in the UK are extremely damaging given the UK runs the highest negative basic current account balance in the G10, so it seems Mark Carney and the BoE are extremely keen to keep rates lower across the curve. We were neutral on cable yesterday given the technicals, however the balance has changed somewhat and we feel traders will look to sell rallies on the back of the new forward guidance.

Looking at gold, it’s all about the US non-farm payrolls at 22:30 and the implications the market will set for future Fed tapering. The market is expecting 165,000 jobs to be created in June, which is a modest slowdown from the prior month and we’d expect a number above 180,000 to provide an upside lift to US bond yields and thus downside pressure on gold. Of course the market will have to look out for other metrics such as hours earned and worked, while the participation rate will be key when looking at the unemployment rate.

The talk on the floors is about a press conference between the PBOC and CBRC (Central Banking Regulatory Commission) and we’d expect to hear more on liquidity provision and banking reforms, although it has to be said there has been a calming in the money markets of late. The market will still be keen to hear what they have to say.

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