Foreign Exchange Rates - GBP/EUR Down While USD Remains Under Pressure

Modified: Friday, 4 March 2011 10:40 BST - Written by John Cameron

STORY LINK Foreign Exchange Rates - GBP/EUR Down While USD Remains Under Pressure

The Pound Dollar exchange rate (GBP/USD) is 1.6260 at present and the Pound Euro exchange rate (GBP/EUR) is 1.1640.

GBP/EUR started yesterday’s European session trading just above 1.1790 and had touched 1.1649 before the end of the North American session. It is currently holding marginally below the key 1.1650 level. The next support level for GBP/EUR comes at 1.1531, the 2011 low for this pair.

The Euro strengthened against all majors yesterday as the European Central Bank elected to maintain its key lending rate at 1.0%, as expected. The real surprise of the day came when ECB President Jean Claude Trichet delivered his post-announcement press conference.

Trichet’s comments were of an ultra-hawkish tone as he called for ’extreme vigilance’ towards rising prices in the Eurozone. He went on to state that with prices already on the up in the single economic area, there was a danger that the spike in costs, which will be caused by the recent Arab uprising, could cause ’secondary effects’, i.e. a European wage-price spiral.

Analysts have interpreted Trichet’s comments as a de facto pre-announcement of a rate rise at April’s meeting and the EUR strengthened on the markets accordingly.

Meanwhile, on the other side of the equation, GBP showed broad weakness throughout yesterday’s session, caused primarily by the release of worse-than-anticipated Service Sector data yesterday morning. The UK PMI Services figure for February had been expected to come out at 53.7, but disappointed analysts by showing at only 52.6, down from 54.5 last month. The services sector makes up 75% of UK domestic product, so this figure has caused concern about whether the UK’s real economy is strong enough to shoulder the impact of a near-term rise in base rates.

In the absence of any data releases of note in the UK or Eurozone today, it is highly possible that we will see GBP/EUR trade down to its key support level at 1.1531, the 2011 low.

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