Trichet signals rate hike; all eyes focus on today’s Greek vote
29/Jun/2011 • Currency Updates•
Sterling hit an eight-week low against the euro on Wednesday as the single currency gained broad support ahead of a Greek vote on dramatic austerity measures, which many in the market expect to pass. The euro edged up to its strongest since early May. While the euro was bolstered, sterling struggled a day after Bank of England policymakers kept alive the possibility of more monetary easing.
Data on Tuesday confirmed that Britain’s economy grew a tepid 0.5% quarter-on-quarter in the first quarter, while annual growth was revised to 1.6% from 1.8 and the current account deficit narrowed much less than forecast.
Sterling’s trade-weighted index fell to 78.0, its weakest since late May 2010, helped as the pound hit another record low versus the Swiss franc as concerns over the debt crisis in Greece encouraged investors to seek safe assets.
Investors have pared back expectations of a UK rate hike due to a run of dismal economic data. The BoE’s dovish stance, outlined in policy meeting minutes published last week, contrasts with the position of the European Central Bank, which is thought likely to raise rates in July. Money markets are not fully pricing in a BoE rate rise until July 2012, a marked change from the start of the year when they were pricing in at least three quarter-percentage-point rate hikes by end-2011.
The euro traded strongly against the pound and dollar during Tuesday trading as ECB President Jean-Claude Trichet stated policy makers are in “strong vigilance mode”, boosting interest rate increase expectations for July. The ECB last raised its benchmark level in April by a quarter point to 1.25% and this type of raise is anticipated the next time they meet on July 7. Today the markets await Greece’s parliamentary vote on an austerity package which will be necessary to secure more financial aid to the tune of €12Bn.
The dollar lost ground against the pound and euro on Tuesday as market confidence improved ahead of Greece’s vote to approve a budget plan. Risk sentiment has improved among investors, as if the austerity measures are passed within Greece it will be the first steps towards their fiscal recovery. Today is light in terms of macro-economic data out of the US, with the markets firmly fixated on events in Greece.