As expected the European Central Bank (ECB) has today kept euro zone interest rates unchanged at 1%. Of more interest however are the comments from ECB President Jean-Claude Trichet suggesting that ‘strong’ vigilance is required on the rise in inflation and for the first time since the recession/credit crunch, Trichet omitted to confirm that in his opinion euro zone interest rates were at an appropriate level.
This may seem like semantics but for those whose job it is to interpret Trichet’s words, it is by far the strongest indication in over 2 years that interest rates may be about to be increased in the euro zone.
This in a week where the economic data out of the euro zone has been better than expected whilst the same cannot be said of the economic data out of the UK. For instance, German unemployment data for February showed its best level since February 1992. By contrast, just this morning, data out showed a marked slowdown in the UK services sector, by far the largest component of the UK economy.
Nevertheless, the Bank of England (BoE) meet this time next week on 10 March and speculation will be rife in the lead up that the BoE may follow the ECB’s lead which could reverse the recent drop in the value of the pound. To compound the potential for a pound retracement, there is no UK data out over the next 48 business hours and the markets have long got used to the idea that ‘no news is good news’ as far as the pound is concerned.
Analysts also believe the ECB is likely to increase interest rates before the Federal Reserve do in the US which has helped the euro to a 4 month high against the US dollar.
Clients with requirements involving the sale of the Euro could do well to take advantage of the rates currently on offer.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
