Euro Rallies After ECB Rate Meeting

The dollar fell on Thursday on a drying-up of safety flows after the ECB decided to keep rates on hold at its monthly meeting leading to speculation of more positive outlook for the region. Unexpectedly positive trade data from China also helped lift sentiment after Exports rose by 14.1% when only a 5% rise had been expected and the Trade surplus rose to 31.6bn versus 201bn forecast.

On the data front, New Jobless Claims (Jan. 5) data showed a rise in claims to 371k from 367k previously when a fall to 365k had been expected but the small rise was dismissed as insignificant; Continuing Claims fell to 3109k from 3236k previously. JOLTs Job Openings (Nov) on the other hand rose to 3676 from 3665; Wholesale Inventories (Nov) rose by 0.6% from 0.3% previously when a fall to 0.2% had been expected.

EUR
The euro rose on Thursday after the ECB decided by a unanimous vote to keep rates on hold. The decision upset expectations that the central bank would either take action or at least issue a more doveish message. A shock recent rise in unemployment and flat-lining growth had stoked fears that the ECB would lower rates however, in the end this proved not the case. Mario Monti said in the press conference afterwards that he saw the outlook for inflation in 2013 as 'balanced' but made no indication of policy direction.

The euro also strengthened after borrowing costs for Italy and Spain fell markedly at bond auctions this morning. The yield for the Spanish 5-year fell to 3.98% from 4.68% in November and Spain's 10-year benchmark fell to a 10-month low of 4.67%.

GBP
The pound rose on Thursday on a growing wave of risk appetite following positive global data and news that the BOE had kept rates unchanged at 0.5% and asset purchases on hold at 375bn, at their monthly meeting. As far as global data went, the day began positively for risky currencies after Spain and Italy managed to lower borrowing rates substantially at auction, with the yield on the Spanish 10-year falling to 4.67% - a 10 month low.

Chinese trade data also surprised investors by showing an unexpected rise in Exports to 14.1% (when only 5% had been expected) and a rise in the trade surplus well above the 20.1bn expected, to 31.6bn, from only 19.6bn previously. Signs that the dragon was rising spurred a massive push higher for risk assets including sterling.

JPY
The yen fell on Thursday after safe-haven demand decreased following positive news from Europe and a less doveish message from European Central Bank which decided unanimously to keep rates on hold. Substantially lower borrowing costs at auctions of Italian and Spanish bonds also helped the outlook for the euro-zone. Under-par data in Japan, showing a fall in Leading Index and the Coincident Index which both fell to 99.1 and 90.1 respectively in November also weighed on the currency.

The yen remains under pressure from background expectations that the BOJ will pursue more aggressive monetary policy measures given the pro-easing stance of the new administration. Tonight key data will be released showing the Balance of Trade, which is expected to fall deeper to -832.0bn from -450.3bn previously.