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ECB And BOE Face Tough Decisions

Written by A Forex View From Afar on Tuesday, March 03, 2009

Ahead of the interest rate decisions on Thursday from the two major central banks in Europe, the ECB and BoE, the market is looking for a direction where the two might be heading.

In mainland Europe, the ECB’s task is becoming tougher as the credit crunch intensifies, on top of the strong criticism it receives from almost every economist because it reduced the interest rates at too slow a pace.

One of the main concerns of the ECB is to reduce the spread between the German Bunds, which are seen as the safest from the region, and the rest of the member countries, especially Greece, Ireland, Spain and Italy. The ECB cannot intervene directly in the Euro-area debt market, but it can influence the demand and the supply side in the secondary market.

Even though the EU regulations are out of the ECB’s reach, the central bank might get help from them. The European Union treaty forbids any member country to have a budget deficit equal or larger than 3% on the long term. To some extent, this means that the government should follow strict fiscal policies, something that would help bring the yields on the government debt somewhat lower.

Additional help might also come from the European Union to reduce the government yields in Europe. Following a call from Germany last week, today, commissioner Almunia said that the EU would not let down any Eastern European state in case its situation worsens and it will bail it out the country before any international institution will, like the IMF. In the last few weeks, investors grew more nervous about the fate of Eastern Europe.

In the U.K., things are starting to point to the BoE will join the Fed and the BoJ into quantitative easing. Today, the Chancellor of the Exchequer, Alistair Darling, said that the central bank has a green light from the government in expanding its balance sheets. The BoE has the approval to print up to $283 billion that would be used to buy government debt and presumably, some high graded corporate debt. In the two day meeting, the Monetary Policy Committee is expected to announce if this measure was approved, with most market participants saying that this decision would be approved very easily.

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There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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