ECB has faltered in the past

ECB has faltered in the past

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 7th of January.

The European Commercial Bank ended 2012 on a high. President Mario Draghi was announced person of the year by the FT and politicians appointed the central bank as the region’s banking supervisor. Amid a general loss in confidence, the ECB has stood tall. It should however be remembered that the ECB’s history is less than impressive.

True, the case for a single banking supervisory mechanism is overwhelming since a flawed common currency had led to a huge systemic risk. The ECB, through its Financial Stability Review, recognised the need to identify systemic risks right from the first FSR published in December 2004 even though the European Systemic Risk Board was yet to be established. Nonetheless, the ECB remained preoccupied with global trade imbalances between China and the US rather than focusing on the internal trade imbalances in the Europe. There was no data available on Greek banks’ exposure to the country’s sovereign debts or the German banks’ exposure in the Spanish property market. In a nutshell, the ECB focused on global economy, particularly on the US economy, before the present crisis.

The surprising blind spot was possibly created by to the ECB’s failure to recognise the economic dissonance between the member countries and a resolute belief in unity. Fortunately, the ECB is more aware of the bank-sovereign nexus and the macro-economic imbalances now. Draghi, like his predecessors, should not assume the eurozone as a homogeneous economy and establish a supervisory framework that recognises and addresses the differences adequately.


GBP/EURO – 1.2306
GBP/US$ – 1.6030
GBP/CHF – 1.4865
GBP/CAN$ – 1.5822
GBP/AUS$ – 1.5290
GBP/ZAR – 13.7906
GBP/JPY – 140.44
GBP/HKD – 12.4165
GBP/NZD – 1.9316
GBP/SEK – 10.5064

EUR: Euro managed to gain ground against the US dollar on Friday after a lacklustre week despite slipping to a three week low against the greenback in early trading. German retail sales grew by 1.2 percent versus expectations for a 0.9 percent rise while Italian and Spanish Services PMI printed better than expected. The tides however turned in the afternoon after US non-farm payrolls number showed sustained recovery in the US employment market and the EUR/USD pair rose to 1.3080. There not much important economic news coming out of Europe this week except Thursday’s interest rate decision by the European Central Bank and any rate cut seems unlikely despite the central bank’s dovish tone in the last policy meeting. The EUR/USD pair opens at 1.3020 this morning.

USD: The US dollar maintained its upward journey early Friday, following Thursday’s surprise FOMC minutes that showed many policy members favoured halting the Fed’s bond-purchase program. Risk sentiments however received a boost in the afternoon after the US non-farm payroll number printed at 155k vs. expectations for 150k. The pound had slipped to 1.6010 against the greenback in the morning after UK Services PMI reading fell below the crucial 50 level in December indicating contraction for the first time in two years. Focus is likely to remain on the Bank of England MPC meeting on Thursday along with the monthly manufacturing data on Friday. The GBP/USD pair opens at 1.6040 this morning.

Have a great day!


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