Overnight, the euro and the pound both pushed higher as traders welcomed the details of the ECB’s highly-anticipated bond purchase programme.
While the euro initially slid after the Central Bank slightly lowered its 2012 growth predictions (hardly a surprise), it quickly rebounded as Mr Draghi detailed some of the finer points of the plan. The programme, being dubbed Outright Monetary Transactions (OMT), will be open-ended and the liquidity created by it will be fully sterilised. It will focus on buying bonds with maturities of between one and three years. Mr Draghi stressed on the strict conditionality of the EFSF/ESM programme, noting that the Governing Council could suspend the programme for a member state in case of non-compliance.
He also noted that the ECB will rank pari passu with private creditors for the bonds purchased under the OMT programme. The details of the programme more or less lived up to market expectations, and hence the euro’s gains were relatively muted after yesterday’s 80 basis point advance after the details of it were leaked. The BoE kept its policy rate and asset purchase target unchanged at 0.5% and £375 billion respectively, in-line with expectations. Also acerbating the rush into risk currencies such as the euro and pound were a strong suite of economic data out of the US. The Service Sector ISM index rose to 53.7 in August, beating consensus estimates of 52.5, with the employment index bouncing back to 53.7 from 49.3 in July.
The August ADP private sector employment report was also stronger-than-expected (210,000 versus 145,000), while weekly jobless claims fell by more than expected. The interesting question now is what will tonight’s US non-farm payrolls report reveal? A weaker-than-anticipated number (130,000) will likely push the dollar lower on heightened QE expectations from the Fed, meaning more potential upside for both the euro and the pound. In early Asian trade he euro and the pound are essentially unchanged from their respective US closing levels of 1.2631 and 1.5932.