ECB Sees Recovery - 11.1.2013

Yesterday the European Central Bank held its policy meeting. The Bank kept policy rates unchanged with the main refinancing rate at 0.75% (see chart). Investor sentiment improved after the Bank’s head Mario Draghi sain in a press conference that gradual recovery in the euro area will come later in 2013. He also mentioned that economic indicators had already stabilized, although at low levels, and that financial markets confidence improved considerably. ECB Main Refinancing Rate Before the meeting there were speculations on the market that the ECB may discuss further interest rate cuts later in the year, but now such an option looks less probable. The euro and other risk-sensitive currencies rallied. Pair EURUSD rocketed yesterday by almost 250 points, having approached its December highs (see chart). The British pound also gained ground and strengthened versus the greenback by 170 points to 1.6178. The Bank of England also yesterday refrained from changing its main policy tools. EURUSD, daily chart The euro has shown an impressive performance against the Japanese yen. We have already highlighted this pair. Yesterday it gained more that 300 points and today reached the highest level since May 2011 – 118.57. Not only the euro strengthening contributed to the pair’s growth, but also the weakness of the yen, caused by active stimulating policy of the new nation’s government. Today the Japan’s cabinet approved a 10.3 trillion yen fiscal stimulus package, aimed at accelerating economic activity and overcome deflation. Today the data also showed that Japan’s trade balance deficit increased in November 2012, while current account had a deficit.