The Dollar index started the week on a positive note, rallying towards a seven-week high of 81.166, after the ADP report showed private employers added a better-than-expected 238,000 jobs in December, the strongest increase in 13 months. By the end of the week, the Dollar Index weakened sharply after worse than expected Non –Farm payrolls affirming expectations that the US Federal Reserve will take a gradual long approach to tapering its bond-buying program.
Moreover, on Thursday, the European Central Bank took no new steps at its monthly policy meeting, leaving its key interest rate unchanged at a record low of 0.25 percent, despite worries about a weak recovery and low inflation. Indeed, the Eurozone economy grew only 0.1 percent in the third quarter and the annual inflation rate dropped to 0.8 percent well below the ECB’s goal of just under 2 percent. The European Central bank president, Draghi reiterated the ECB’s forward guidance that the official interest rates could remain at current lower levels for an “extended period”.
Finally, the Bank of England’s Monetary Policy Committee voted to maintain the Bank Rate at 0.5 percent. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at 375 Billion pounds.
The US Senate confirmed Janet Yellen as the next head of the US Federal Reserve. Indeed, fifty six senators voted in favor of Ms. Yellen and twenty six opposed .Yellen will succeed Ben Bernanke, whose second term as chairman ends on Jan. 31. She is widely expected to continue many of the policies of her predecessor, especially the efforts to lower unemployment rates. President Obama welcomed the vote, saying, “The American people will have a fierce champion who understands that the ultimate goal of economic and financial policymaking is to improve the lives, jobs and standard of living of American workers and their families.”
The United States trade deficit dropped to its lowest level in 48 months as exports hit a record high and imports of foreign oil hit a three-year low. The trade gap dropped to a seasonally 34.3 Billion US Dollars, marking the smallest deficit since October 2009 and was below economists’ predictions for a 40 Billion US Dollars. With better than expected trade deficit data, economists pushed up their 4th Quarter GDP growth estimates by as much as 1 percent point to as high as a 3.3 percent annual rate.
Last week the Federal Open Market Committee released the minutes of the Committee meeting held on December 17-18, 2013, where they announced that they would start the tapering process by $10 Billion US Dollar and announced that they would keep the short-term interest rates low until 2016. The information reviewed for the December 17-18 meeting indicated that economic activity was expanding at a moderate pace, the unemployment rate was declining but remained elevated and the consumer price inflation continued to run below the Committee’s objective. According to the minutes, the majority of participants judged that the benefit of further asset purchases was likely declining with some participants expressing concerns about the marginal costs of additional purchases arising from risks to financial stability.
Europe
Weakening European Inflation
The Euro zone inflation rate fell in December further away from the European Central Bank’s target of just below 2 percent, increasing their challenge of avoiding deflation as well as supporting a sustainable recovery.
The annual inflation rate dipped to 0.8 percent from 0.9 percent in November, in line with market forecast. The Inflation rate has been below the ECB’s 2 percent ceiling for 11 months, although the European Central Bank president Mario Draghi said there were no signs of deflation or an urgent need for another rate cut. However, he added that it was important that inflation is not stuck permanently below 1 percent.
Last week, the European Central Bank kept its interest rates at record low 0.25 percent.The ECB President Mario Dragi said the rates would “remain at present or lower levels for an extended period of time”. The European Central Bank underlined its determination to take action should the Euro Zone inflation risk turn into deflation.
Draghi said in a news conference that the Eurozone “may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below but close to 2 percent later on”. He also said the economic risks for the Eurozone “remain on the downside” and that the ECB is ready to “take further decisive action” using “all available tools” to spur a weak recovery.
United Kingdom
Last week, the Bank of England left its monetary policy unchanged. Indeed, the committee voted to maintain the Bank Rate at 0.5 percent, also voted to maintain the asset purchase program at 375 Billion Pounds. The Forward Guidance for the Bank of England was not to raise interest rates until the unemployment level reaches 7 percent anticipating that they would not meet the target until 2016. However, unemployment has already fallen to 7.4 percent, and many expect it to fall below 7 percent sometime this year, but Carney has repeatedly made it clear that a fall in the unemployment rate to 7 percent would not result in an automatic rate rise. It is likely that the Bank would employ other tools, such as controls on mortgage lending, before it considers putting up interest rates.
The United Kingdom service sector continued to expand strongly throughout 2013, with new business and employment rising at noticeable rates. The UK Purchasing Manager’s Index fell to a six-month low of 58.8 in December, rather than holding at November’s level of 60. Nonetheless, the figure remains well above the 50 mark that separates growth from contraction, and business confidence rose to the highest level in nearly four years, suggesting a very bright outlook for 2014.
The Peninsula
