FTSE Took Off, EUR/USD at 3 Month High

Published by Filipe R. Costa on Thu, 03/03/2011 - 17:48
take off

Finally the FTSE was able to open higher and keep gaining through the day session without a late retracement. Fears about Middle East are still in place, but after a good run of economic and corporate news, markets are edging higher and recovering losses from past days. Today the FTSE rallied 90 points, or 1.52%, closing above the 6,000 level, at 6005.09. DAX 30 also rose, but by a more modest 0.62% figure.

During the morning, the FTSE was not affected by the release of Services PMI. The reading was at 52.60, a little bellow expectations, but still representing expansion. The GBP suffered from the negative surprise, rapidly edging lower from its day high at 1.6324 against the USD to close at 1.6253.

On the beginning of the afternoon (London time), the ECB announced the key interest rate to be left unchanged at 1%. That was not a surprise but Trichet speech was much different from last ones. Trichet said that “an increase in interest rates in the next meeting is possible”, surprising everyone. The ECB increased its outlook for inflation rate from an interval of 1.3 – 2.3% to 2.0 – 2.6%. Trichet reiterated the ECB policy of keeping inflation bellow 2%. The market perceived that a rate increase is in the books sooner than later, pushing the EUR/USD pair to a 3-month high at 1.3974.

At around the same time, jobless claims numbers came in surprisingly better at 368k, the lowest since May 2008. This number declined in 4 of the last 5 weeks, and is another signal of economic recovery picking up. Those numbers were certainly not ignored by US markets, opening much higher with the DOW climbing 1.5% at 5pm. Oil prices gave some rest to equity markets today, and investors concentrated in economic news.

The USD has been in poor territory over the last few weeks. The safe-heaven currency is now not-so-safe, losing value against all major pairs and clearly showing it is not in investors’ preferences. The problem with the USD is mainly because of the US Government deficit and interest rate outlooks. The UK is nearing a rate hike. Today, the ECB also gave room for a rate increase. With record low interest rates in the US, with the current accommodative monetary policy of buying Treasury Debt, and with no outlook for any increase soon; it would be a surprise if the US Dollar were rising.