Sterling gains versus euro as ECB signals interest rate rise unlikely

Tom Tong06/May/2011Currency Updates

GBP

Sterling rebounded from a 13-month low against the euro on Thursday after the European Central Bank signalled it may not raise interest rates again next month as anticipated. ECB President Jean-Claude Trichet offered a much less hawkish tone on the central bank’s rate outlook than markets had been expecting after April’s hike, prompting traders to book profits on the euro’s gains versus sterling after weak UK services data earlier in the day drove the pound lower against the common currency.

EUR

The euro plunged across the board on Thursday, on track for its worst day against the dollar since November, after comments from the head of the European Central Bank suggested interest rates were unlikely to rise next month.

ECB President Jean-Claude Trichet, in remarks after a policy meeting where the central bank left interest rates unchanged at 1.25%, failed to use the key words “strong vigilance” in his comments on inflation. In the past, the ECB regularly used the phrase to signal a rate hike was only a month away. Before the ECB meeting, the markets had priced a 40% probability of a June hike. The probability has now declined to almost zero, while the implied probability of a July rate increase was now at 75%, analysts said.

In early afternoon trading, the euro fell 1.9%, well off Wednesday’s 17-month high, and was headed for its worst day since November.

USD

The dollar made gains on Thursday, with key resistance levels in its grasp as tumbling commodity prices and a series of soft US data prompted profit-taking in higher-yielding currencies.

While commodity prices stabilised somewhat on Friday, they could fall further after upcoming US jobs data, driving more gains in the dollar as the euro and commodity currencies are likely to fall in sympathy with other risk assets.
A weak US jobs reading is likely push the Japanese yen near a seven-week high against the greenback on Thursday as it would likely trigger short-covering in the currency, which is often used to fund investments in risk assets due to low interest rates.

The catalyst for the dollar’s rebound was a massive fall in commodities on Thursday. Brent crude oil LCOc1 dived to a record $12 a barrel and silver slumped by nearly $5, its biggest one-day decline since 1980, though they stabilised on Friday. Many market players had been buying commodities on the view that money-printing by the US Federal Reserve should boost their value, which in turn was fuelling inflation worldwide, prompting some central banks to raise rates.

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Written by Tom Tong

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