Will the ECB lend covered loans to financial institutions?

The Euro rose 0.64% to $1.36938 against the US Dollar yesterday as Greece unveiled a new austerity package. Since news broke of Greece’s 300bn Euro debt, the single European currency in the forex online market has been tumbling against its major counterparts – striking a 10 month low against the dollar, this past Tuesday.

Yesterday the Greek government unveiled an austerity package worth 4.8bn Euros -a host of tax increases and spending cutbacks. Greek government officials hoped this will bolster the Euro in international markets and convince European leaders that they are doing enough to merit a possible bailout.

Retail Sales in the 16 country zone slipped in January, raising new concerns about the strength of the area’s economic recovery. According to Eurostat, sales volume within the Euro Zone fell 0.3% from December and was 1.3% lower than in January 2009. While the monthly drop in sales was weaker then the market expectations of -0.5%, economists warned that sales could continue to fall in February.

The weakness of this data cemented expectations that the European Central Bank will keep its benchmark interest unchanged at its current record low level of 1.0% (announced later today at 1245GMT). The announcement will be followed by a press conference and there is speculation that the ECB may announce that it will lend covered bonds to financial institutions as part of a strategy to increase collateral. The press conference will be closely watched by traders as it has the potential to cause huge volatility in the market due to the off the cuff format.

Across the Channel the British Pound rose across the board, appreciated against 13 out its 16 major currency counterparts – including gaining a record 0.89% against the USD, to close at $1.50959. This abrupt increase came after the Services PMI unexpectedly jumped to 58.4 from 54.5 in January. The UK dominant services sector expanded sharply to more-than-a-three-year high in February, boosted by strong new orders and business activity- adding evidence that the first-quarter GDP grew at a faster pace than in the final three months of 2009. According to senior economists at the Markit, this latest piece of data highlights the underlying trend that in the private sector remains positive, and is on course to deliver a quarterly expansion above 1.0% in the first quarter. According to economists, this positive survey will reinforce the expectation that the Bank of England's Monetary Policy Committee (MPC) will not be extending its £200bn quantitative easing (QE) program (1200GMT).

At noon today, the BoE will announce whether or not it will raise its benchmark rate from its record low level of 0.5%. Analysts predict that the central bank is unlikely to raise change interest rates, as any raise in the cost of borrowing could jeopardize the country’s fragile economic recovery.