Euro hit hard ahead of ECB meeting later

• EURUSD falls to lowest since December 2003

• Bank of England will celebrate 6th anniversay of 0.5% base rate

• Targets, impact and success of QE all still unclear

• USD to remain strong ahead of tomorrow's US jobs report

Good morning,

The euro was smacked hard yesterday ahead of today’s European Central Bank meeting. Mario Draghi and the rest of the ECB are expected to announce further details of their EUR1.1trn asset purchase program later today although the bank will not begin the purchases of EUR60bn a month until next week.

The movements that this plan will likely have on the European government bond market will keep the interest rates that investors are able to obtain at very low or negative levels moving forward. We have to think that this will keep the pressure on emerging market assets as money that is hungry for some kind of return takes on more risk in order to get it.

As for the reaction of the euro, we must also remember that the European Central Bank has cut interest rates within the Eurozone to -0.75% i.e. banks are losing money holding euros on deposit. While the impact may not be felt by consumers in the Eurozone, it is a major concern for currency investors. Negative interest rates are poisonous for investors searching for a yield on their investments.

These ultra-low rates allow people to borrow in euros and invest elsewhere at very cheap rates. To invest in Australia for example, a bank could borrow euros then sell them for Australian dollars. This ‘carry trade’ to make money on the difference in interest rates will lead to a de facto weakening of the currency that is used for funding the investment, in this case the euro.

While the structure of the asset purchase plan is all well and good, I personally think that the most important question that the ECB needs to answer is just how they can measure success. Is it simply inflation expectations? We receive the latest inflation and growth forecasts from the ECB’s analysts within this announcement as well.

EURUSD crashed to the lowest level since December 2003 yesterday with broad USD strength also helping to push GBPUSD lower. While the reaction seemed slightly overdone yesterday, you would have to be brave man to be against the US dollar into tomorrow’s US jobs report.

The ECB will announce any policy changes at 12.45 while their press conference from Cyprus takes place at 13.30.

Today is the sixth anniversary of the Bank of England cutting interest rates to 0.5%. Let’s not pretend that anything exciting will happen today because it won’t, although news from the UK remains strong.

Data from the UK services sector remained solid in February and continues the belief that any dip in fortunes seen towards the end of last year was merely a blip. The services sector continues to add jobs, with February’s additions coming at the second highest rate on record. Higher wages are also being seen for sector participants, which is a necessary and welcome reaction to tightness in the labour market and competition between companies.

This competition is also helping rebuild inflation - albeit slowly - within the sector. Should this continue, then the pressure on the Bank of England to raise rates will only increase from the UK’s largest and most valuable sector. Taking the recent run of PMIs together, Q1 GDP is forecasted at 0.6% with potential for an upside surprise.

Have a great day.