Euro rallies on ECB rate hike speculation; markets eye UK GDP figures

Tom Tong25/Jan/2011Currency Updates

GBP

Sterling fell against the dollar yesterday as speculators scratched their heads over the possibility of the Bank of England increasing interest rates sooner rather than later. The currency touched the significant 1.60 mark but then retreated. Another factor behind the downwards move was traders profit taking on the previous sharp move towards the back end of last week. This saw sterling 0.2% down against the dollar at the close of the London session.

The departing head of the CBI, Sir Richard Lambert, launched a heavy verbal attack on the coalition government yesterday, suggesting it was pursuing policies that could damage the UK’s economic growth. He believed polices associated with the immigration cap, the abolition of the retirement age and policies over localism and carbon reduction could all amalgamate to stifle job creation and economic growth. He argued that government regulations have hammered small businesses at a time when the private sector is expected to take the slack from government and public sector cuts.

The market will today be focused on the Q4 GDP figures at 9.30 and also the BOE Mervyn King’s speech at 19:40. Any positive movement in GDP estimates could give sterling a boost with King’s press conference giving an insight as to how the BoE observes the current UK economy and the value of the GBP. His comments may determine a short-term positive or negative trend.

USD

The greenback fell to a two month low against the euro yesterday as the single currency benefitted from increased speculation that European leaders will hike interest rates in order to battle inflationary pressures. Suggestions of rate hikes in the UK and Europe are in stark contrast to the policy of the Fed, which is more focused on creating jobs, amid a much more cautious view on the US economic recovery revealed during the Fed’s policy meeting last Wednesday.

Another factor that undermined the performance of the dollar yesterday was the renewed risk appetite in the market after Wall Street resumed its rally and pulled the other markets along with it.

EUR

The euro had a strong start to the week, hitting new highs against the dollar, almost touching 1.37 and forcing GBP/EUR well below 1.19. The move was down to ECB president Jean Claude Trichet stressing the need to keep inflationary pressures in the Eurozone in focus; prompting speculation of interest hikes sooner rather than later, making the currency more appealing to investors. Even continued political turmoil in Ireland, reminding the markets of continued sovereign debt issues, and a terror bombing at a Russian airport only marginally capped the move.

Some market players also remained sceptical over the chance of an ECB rate hike, thinking that concerns about highly indebted peripheral Eurozone countries could tie the central bank’s hands. Nevertheless, the single currency has been persistently supported by continued and robust demand from Asian central banks, a demand that has prompted the speculative market to reverse positions in an abrupt turnaround of the currency’s fortunes last week.

Elsewhere, The IMF stressed the continuing need to increase the effective size of Europe financial rescue fund (EFSF) to ensure European states can always be bailed out in future without contagion to others. The IMF statement also maintained that further rigorous stress tests on European banks where needed to fully restore investor confidence in the Eurozone.

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Written by Tom Tong

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