Morning Foreign Exchange Report : Euro Rides High on Interest Rate Expectations, EUR/USD Rate Dependent on Non-Farms

1 Apr 2011 at 6 AM - Written by John Cameron

STORY LINK Morning Foreign Exchange Report : Euro Rides High on Interest Rate Expectations, EUR/USD Rate Dependent on Non-Farms

The Pound Euro exchange rate (GBP/EUR) is 1.1321. The Euro Dollar exchange rate (EUR/USD) is 1.4173.

The results of the Irish Central Bank’s Stress Test on four leading Irish retail banks were released yesterday. The findings showed that one fully-nationalised bank, the Anglo Irish, has incurred losses of €18bn, which equates to over 30% of the Irish Government’s total annual income.

The report went on to suggest that if projections regarding the future performance of the Irish economy are correct, then the funding gap for the four banks tested will be €20bn over the next three years alone. The Spanish retail banking sector could be the next area of concern for the ECB, with a number of Cajas already facing severe funding problems.

Despite looming fears over Eurozone banks, the Euro gained further ground against its main rivals during yesterday’s session. This was largely due to increasingly hawkish ECB interest rate expectations for next week‘s meeting.

Yesterday’s higher than expected Eurozone CPI Inflation figure for March stoked rumours regarding the possibility of a greater than 25bps hike from the ECB when it was released at the start of the morning session. Analysts had expected the figure to print at an annualised 2.4%, but the number came out at 2.6%. This figure is yet to absorb the full effect of the recent spike in oil prices due to the Arab Uprising, so has potential to break up through the 3% level in coming months.

The ECB was given further scope for a hike when German labour market figures showed that there had been a reduction of 55,000 in unemployment numbers in this month alone. Futures markets are now pricing in an incredible 150% chance of a 25bps rate hike next week. In effect, this means that there is a 100% chance of a 0.25% raise and a 50% chance of a 0.50% hike.

Meanwhile, in the States, another Federal Reserve Bank member joined Paul Fisher in calling for a near-term cessation of the US Quantitative Easing Programme. Minneapolis Fed President Kocherlakota is the latest in a line of Fed commentators to suggest that a tightening in monetary policy should begin in June with the ending of the programme. The comments caused some near-term support for the US Dollar; if this afternoon’s key Non-Farm Payrolls figure comes out worse than the expected 190,000 number, then the EUR/USD rate is likely to move further off its recent 5-month high of 1.4248 to re-test the 1.4000 support.

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