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The Central Banks roundup

James Boston
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The British Pound and the Euro have arguably been two of the markets ‘in favor’ currencies since the beginning of this year. Both have been challenging long term highs against the US Dollar as the economic recovery begins to take hold. Investors are now very focussed on central bank rhetoric in all 3 economies in an attempt to discern when they will react with tighter monetary policies.

The US Dollar has remained subdued, not so much due to a lack of economic growth, but more so because the Federal Reserve under it’s new chair Janet Yellen has clearly outlined it’s 2014 commitment to both low interest rates and a slow and steady tapering of the bond buyback program.

Investors in developed economies have therefore been jumping on every piece of data out of the UK and the Eurozone in order to second guess the actions of the relevant monetary authorities. This is a situation created by the UK and European Central Banks, they have been less than clear on their medium term plans for monetary policy, either because they appreciate the fragility of the current recovery phase or they simply are unsure as to the best course of action and are awaiting further data.

Whatever is the case, it is contributing to volatility in the respective currencies of the UK and the Eurozone. This was evidenced over the last 24 hours, Sterling reacted sharply to a lower than expected inflation figures while the Euro quickly reversed its bullish trend in response to a weaker than expected sentiment survey.

Strong swings were even experienced in the usually stable EURGBP currency pair yesterday, and although everything finally settled back to the long term trend, it is concerning to see such volatility creeping into a situation where it is largely preventable. Clarity is the simple solution, the ECB and Bank of England should take a leaf out of the US Feds book and provide some leadership and better guidance as we enter this long awaited recovery.

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