Today was meant to be all fireworks and heroics from the Central Banks; the Forex market was awaiting their intervention to redirect the economy away from a deeper recession. Instead, all 3 Central Banks elected to stand with their hands behind their banks and ‘wait and see.’ I am not sure what they are all waiting to see, but now we have to wait with them.
The disappointment started yesterday evening and the FED ruled out further stimulus expansion and almost definitely ruled out QE3. There was expectation that the FED would announce further policy in conjunction with ‘Operation Twist’ which may have danced last summer, but seems to have been a non-hit on this summer’s dance floor. Instead, the FED made clear that the threat to the US economy was the Eurozone and chose to use the stage to pile the pressure on the Eurozone to act. This morning the Bank of England had its chance to act. Although the possibility of a rate cut was slim, there was expectation to see further expansions in QE. This appeared the logical decision as UK GDP has continued to decline, economic outlook is moving toward ‘poor’ and inflation continues to fall back in line – painting the perfect picture for stimulus. Instead the Bank of England decided to leave everything on hold, again believing that the Eurozone will need to settle before economic policy can be added to. The fact that the Olympics has failed to make a positive contribution to the economy is worrying as many had banked on its input, now more so that the BoE has decided to wait on watch.
So, it all came down to the decision of the ECB. The stage was set for a radical shake-up…. And in true Eurozone style all that was delivered was disappointed. The ECB and the Eurozone have great ideas on how to push down the cost of bonds, how to increase the flow of liquidity and how to win the confidence of the market. The only problem is that they have no idea how to settle their political difficulties. Whichever way the ECB and Eurozone go, they only path to settling the issues is to agree with Germany. There is talk on the restructuring of the usage of the EFSF and ESM, the truth is they are short term fixes.
Still cannot believe that the Bank of England and the FED are waiting on Europe to solve the financial crisis. *shaking head in disbelief* (JKM).