Foreign Exchange Report : GBP EUR Rate Trades Lower Following ECB Interest Rate Hike and Trichet’s Press Conference

8 Jul 2011 at 8 AM - Written by John Cameron

STORY LINK Foreign Exchange Report : GBP EUR Rate Trades Lower Following ECB Interest Rate Hike and Trichet’s Press Conference

The Pound Euro exchange rate (GBP EUR) is 1.1123. The Pound Dollar exchange rate (GBP USD) is 1.5948. The Pound Australian Dollar exchange rate (GBP AUD) is 1.4807.

The Bank of England Monetary Policy Committee surprised no-one when they announced that they had elected to maintain base rate at it’s current record-low level of 0.50%. The European Central Bank’s announcement that they were to raise their key lending rate by 25 basis points from 1.25% to 1.50% had also been widely anticipated, following comments to that effect by ECB President Jean Claude Trichet last month.

However, the market’s reaction to the ECB’s second rate hike since April, surprised many analysts, as investors moved against Europe’s single currency in the immediate aftermath of the announcement. The GBP EUR rate was trading at 1.1193 at the time of the ECB’s statement, but within an hour had traded up to 1.1231, suggesting that some market-participants had been factoring-in a 50 basis point hike by the ECB.

The initial move towards Euro weakness was also attributable to the opening comments by ECB President Jean Claude Trichet in his press conference which followed the announcement. Trichet observed that recent data releases had pointed to a slow-down in Eurozone economic activity. But the ECB President quickly returned to his usual hawkish rhetoric as the press conference progressed, stating that there were medium term ‘upside’ risks to Eurozone inflation and calling for price rises in the seventeen nation economic area to be ‘closely monitored’.

Trichet went on to further placate the markets when he stated that, ‘We say 'no' to selective default or credit event’, when asked if Greece was set to renege on its debt commitments.

Trichet’s hard-line on inflation and sovereign debt saw the Euro rally, with the GBP EUR rate quickly trading down to the low of the day at 1.1115. This move was accentuated by the release of the estimated June GDP growth figure for the UK economy by the NIESR. This closely-watched figure pointed to a quarterly expansion in economic activity of only 0.1% last month versus an increase of half a percent in May. If the Office of National Statistics official Q2 GDP figure, not due for release for several weeks, confirms a softening in UK growth, then Sterling is bound see a renewed bout of selling pressure as the year progresses.


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