Friday, January 10, 2014

Slicing and dicing Mario Draghi’s words | Today is Non-Farm Payroll day in the US

The words spoken by the Head of the European Central Bank yesterday are still being parsed for meaning but a standout already is that the overriding concern of the ECB is now inflation, or to be more precise, the lack of it. Senor Draghi referred more than once to the bank’s mandate being the control of price stability, in both directions, and of the need to ensure that inflation expectations are “anchored”. This is central banker speak for saying that not only must inflation not be too high, it cannot be too low either, and the available data must point to this state of affairs continuing into the future.

Right now Euro zone inflation is way too low, at an annualised rate of 0.7%, when the ECB’s policy is to have it “close to but not above 2.00%”. The accepted measures to deal with this, a lowering of the target interest rate or anything approaching what might look like European style Quantitative Easing, are all totally unacceptable to many in Europe, but especially to the Bundesbank. This is for the reason that such measures are likely to cause asset bubbles at the heart of the Euro zone, which is something that is much feared. As long as the people who are worried about such things hold sway, and as long as they can credibly point to the low inflation figure as being something of a statistical anomaly, it would seem that there will be no change to monetary policy.

Nevertheless, it behoves those of us with an interest in Foreign Exchange trading to keep a good eye on Euro zone inflation figures.

Today is Non-Farm Payroll day in the US

Once again, the figures on payrolls from the US Bureau of Statistics are eagerly awaited by the markets when they are announced later in the Global day. All indications are that they will be good, in the sense that more people are being employed, which will heighten the probability for an end to QE in the US. This will tend to strengthen the US dollar but the market reaction at the time of issue, which is 1:30 PM GMT, or 8:30 AM on the Eastern seaboard of the United States, is likely to be chaotic in the very short term.

As previously noted, many times, entering the market under these conditions can be detrimental to the maintenance of a healthy Forex account equity. For this reason we will be keeping our powder dry until we see the reaction of the market to whatever transpires.

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