Euro strengthens on the back of ECB rate hike speculation

Tom Tong08/Mar/2011Currency Updates

GBP

The pound fell to a five week-low against a strong euro yesterday as the single currency continued to benefit from ECB President Trichet’s hawkish rhetoric on Friday and speculation that the ECB is likely to hike rates prior to the BoE. This week the market is looking towards the Bank of England’s rate setting meeting on Thursday with any surprises likely to benefit sterling in the short term. The chances of a surprise hike were increased yesterday as the CBI openly lobbied the treasury to allow interest rate hikes to combat the growing inflationary pressures in the UK. The CBI has also spoken openly about the need for George Osborne to focus on a fresh ‘all action’ budget that is concentrated in achieving growth through a focus on exports. Research released yesterday also showed that the big high street chains had suffered a dire February, with like for like sales almost stagnating, increasing by just 0.3%, due to reduced consumer demand amide the VAT increase and burgeoning fuel and commodity prices. Overnight the RICS house price balance printed as anticipated at 26%.

EUR

The euro made ground against the dollar and sterling yesterday but the move could be hampered by resurfacing sovereign debt issues in Greece. The single currency benefitted from expectations of ECB rate hikes as soon as next month but then saw gains limited through Asian trading as profit taking and Eurozone sovereign debt issues re-emerged following ratings agency Moody’s downgrading Greece. Moody’s cut Greece’s debt rating by two levels over continued concerns that there are not sufficient structural reforms in place yet for the country to be able to service its debts in the long term. The Greek Ministry of Finance said the downgrade is completely unjustified. Despite its recent strength, the euro could suffer next week if there is no resolution between EU leaders at a policy meeting on Friday. The meeting is to focus on additional measures to resolve the region’s sovereign debt issues and come up with a comprehensive package for the future to stop the resurfacing of the type of issues that weighed on the currency so heavily over the summer. The only data release of marginal significance in the Eurozone today is German factory orders at 11.

USD

The dollar was down against sterling and the euro yesterday but has made back some ground overnight through Asian trading as some profit taking occurred. The recent surge in the value of crude oil and lingering concerns over potential disruption in oil supply due to the political turmoil in Libya and the Middle East, have weighed on the dollar as they are likely to effect US consumer spending patterns. The recent softening in the dollar against both sterling and the euro can be attributed to the market expectation that the ECB, and then the BoE, will raise interest rates prior to the Fed, making the greenback a less attractive proposition to short term investors. The US Federal Reserve is expected to keep monetary policy loose for some time, highlighting the Fed’s focus on the US economic growth outlook rather than inflationary pressures. The positive NFP jobless figures on Friday seem to have made little impact on the dollar’s recent weakness but we could see a turnaround if we see more positive initial jobless figures on Thursday.

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Written by Tom Tong

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