Currency Exchange Update: Big Day Ahead in Markets

After two relatively quiet days in the markets, today should see a return to volatility with a full agenda.

The Bank of England’s Monetary Policy Committee will issue its monthly policy decision at 12 noon today. Whilst the majority of analysts expect a ‘no change’ decision, there is just the possibility that with the weakness in the UK economy the policymakers may be moved to increase the size of their quantitative easing program in an effort to stimulate growth.

Forty five minutes later and it’s the turn of the policy makers in Frankfurt to announce their monthly policy decision. Again, the markets expect the European Central Bank to adopt a ‘no change’ policy for the time being but with the euro reaching 15 month high’s recently against both the pound and US dollar, there is concern amongst senior policy makers that the rise in the euro will hamper the economic recovery in the euro zone by making exports uncompetitive.

The policy statement from ECB head Mario Draghi will as always be keenly watched.

Today will be capped off by the first of many grilling by the UK Treasury Select Committee of incoming Bank of England Governor Mark Carney, the current Governor of the Bank of Canada who will take over from Sir Mervyn King in July. Recently, Carney has been quoted as suggesting that the UK economy needs to achieve ‘escape velocity’ from recession, a hint that further policy easing may lie in wait.

Yesterday, the euro fell against the dollar as concern grows that an escalating political corruption scandal in Spain and a climb in the polls in the run up to general elections in Italy by Silvio Berlusconi may reverse the progress made by the euro zone since last summer when Draghi stated that he would do ‘whatever it takes’ to safeguard the euro.

The latest opinion polls in Italy shows a growing popularity for former Italian Prime Minister Silvio Berlusconi’s political coalition. Berlusconi has said he would reverse reforms put in by current Prime Minister Mario Monti.

Yesterday, the Organisation for Economic Cooperation and Development (OECD) reported in its latest survey of the UK economy that the time path followed by the country in reducing its fiscal imbalance should make allowance for a temporarily slower pace of economic growth, if necessary.

The OECD states “It is appropriate to allow the deficit to shrink more slowly than initially planned to cushion the shock and help households through any downturn,” adding that “additional tax increases or spending cuts - beyond those already planned - should not be imposed to compensate for a temporary slowdown.”

As regards the role of monetary policy, the OECD goes on to say that “overall, in the current economic situation, further expansion of the asset purchase programme would be warranted if the economy stays weak.”

For the current tax year the research body forecasts UK gross domestic product to grow at a 0.9% rate followed by an expansion of 1.6% in 2014.

Meanwhile, the Institute for Fiscal Studies reported yesterday that the UK will borrow £64 billion more than what was expected by the time of the next general election comes round in 2015 after weak growth plays havoc with Chancellor George Osborne's deficit reduction plans. In its "green budget" annual health check on the public finances, the IFS said the chancellor was allowing extra borrowing to take the strain during the current parliament at the expense of another bout of austerity after the 2015 election.