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Foreign Exchange

Draghi wins again as he talks the euro down

As Britain's prime minister and his allies fight to restrict subsidies to French farmers and fisherpersons, UK newspapers are full of EU-related stories. President Hollande "snubbed" Mr Cameron by petulantly refusing to turn up for a meeting with him, Chancellor Merkel and President Rompuy. Britain's new national curriculum will no longer stress the European Union as anything more than a group of greedy and reactionary states, addicted to bureaucracy and waste. But the EU has the last laugh. Another story shows the extent to which continental cuisine has overtaken traditional British fare: The national dish is no longer chicken tikka masala, it's lasagne di cavallo.

And it isn't just in Britain and Brussels that the horse trading is going on. Europe's two most important central banks were at it yesterday, doing their best to lead market opinion along their preferred paths. The Bank of England's contribution was a statement following the monthly meeting of the Monetary Policy Committee. Usually, when there is no change to policy the Bank issues a brief 44-word note to that effect. Yesterday's effort ran to 581 words and amounted to a summary of the minutes that will be released in two weeks' time. Its drift was that growth will be slow and inflation will remain above the 2% target for a while. Its purpose was apparently to manage expectations ahead of next week's quarterly Inflation Report.

Meanwhile, the incoming governor, Mark Carney, had been expounding to the Treasury Select Committee on the philosophy he will employ when he starts the job. His key comment was that "I'm not convinced that [scrapping the inflation target] is a risk worth taking." Until then, investors had been under the impression that he did believe the risk was worthwhile so when he denounced the idea sterling jumped nearly a cent against the US dollar and the euro which will influence people who send money abroad.

After lunch European Central Bank President Mario Draghi displayed once again his masterly ability to lead the market by the nose. At his monthly press conference he described how the euro's newfound strength could put downward pressure on inflation. By linking the two he encouraged investors to believe that a stronger euro would mean lower interest rates for longer. With that in mind they piled out of the European currency, sending it a cent and a half lower against the pound and the US dollar over the next two hours.

So successful was Sig. Draghi's verbal intervention that the euro was Thursday's most weakened currency in foreign exchange. The top two performers, for the second day in succession and the third time this week, were the pound and the Japanese yen.

Yesterday's UK economic data were no obstacle to sterling; the trade deficit narrowed and industrial production went up by 1.1% in December. German industrial production also increased in the month but only by 0.3%.

Today began with a narrowing of China's trade surplus, as imports grew more quickly than exports, and a fall in the rate of inflation from 2.5% to 2.0%. Swiss unemployment fell from 3.3% to 3.1%. Germany's trade surplus widened, with exports rising and imports down. The rest of today's European ecostats extend no further than Italian and Greek industrial production and Greek inflation. This afternoon come the trade figures for Canada and the States, Canadian housing starts and the important Canadian employment data.

After three winning days this week the pound could normally be expected to suffer some profit-taking sales soon. However, its overall performance over the last seven days has been far from impressive. It may be able to hold its position through to Monday.