Draghi Prepares Markets for Monetary Stimulus

· Aussie gained yesterday after encouraging local and Chinese data;
· Bank of England make no changes to interest rates or asset purchases;
· Draghi prepared markets for monetary easing at June’s ECB meeting.

The Aussie began yesterday’s Asian session trading sideways as markets awaited direction from unemployment numbers and Chinese trade balance data. Upon the announcement of local unemployment data the Aussie soared higher, making further gains after encouraging Chinese data. The local currency eventually found resistance close to the 94 US cent handle that seems to be coming increasingly difficult to break. Local data showed more jobs were created in April than previously expected with the annualized unemployment rate holding at 5.8%, beating expectations of a rise to 5.9%. Subsequent Chinese data revealed a surprise increase in both imports and exports eventually sending the Aussie towards monthly highs.

As it was widely expected, the Bank of England made no rash decisions yesterday and made no changes to monetary policy. On the whole, the UK economic outlook has improved dramatically over the last 12 months. Unemployment has fallen below the 7% threshold and inflation has steadied, however the housing market has become a concern for policy makers with house prices escalating out of control. A leading indicator of UK house prices yesterday showed growth reversed slightly in April causing the pound to drift lower as hopes of an immediate rate rise drift away.

Across to Frankfurt, the ECB made no change to policy yesterday but attempted to prepare the markets for some sort of action at next month’s meeting. The euro had drifted higher against the dollar throughout the Asian session, gains were soon reversed as Mario Draghi held a press conference after the rate decision. Comments attempted to prepare markets for a change in monetary policy at next month’s meeting saying that the ECB is ‘comfortable’ with acting next time. Whilst Draghi gave no clues to what his action will be, speculation now mounts as to what will be revealed in June’s meeting. What we do know is that the ECB is not comfortable with the Euro at $1.40 and is looking very likely to uncover monetary stimulus at next month’s meeting.

Tom Williams
Sales Trader