Pound To Euro Exchange Rate Eases As ECB Monthly Report Alters Investors? Eurozone Interest Rate Expectations

Published: Friday, 13 April 2012 09:00 BST - Written by David Woodsmith

STORY LINK Pound To Euro Exchange Rate Eases As ECB Monthly Report Alters Investors? Eurozone Interest Rate Expectations

Yesterday’s session in the currency markets saw the euro steady its ship against the other majors, following the release of the European Central Bank’s Monthly Report which delivered a stern message regarding the Bank’s stance on future price rises in the region. The ECB predicted that inflation would remain above 2% for the remainder of this year and possibly for longer. This suggests that the Bank’s hands are tied regarding the future direction of interest rate movements, with little scope for any further cuts in its key lending rate, which currently stands at 1.00%. The ECB’s Board did, however, observe that any hint of price rises would be quashed in a ‘firm and timely manner’.

The unexpectedly hawkish tone of the ECB Board’s rhetoric was reminiscent of former Governor Jean-Claude Trichet’s regular anti-inflationary diatribes during his tenure as President. The threats of a rate cut resonated with particular strength amongst investors, eliciting a rapid re-adjustment of eurozone interest rate expectations. This in turn caused a flurry of support for the single currency, which helped the GBP EUR exchange rate pull back from the 18-month high of 1.2168, which the pair had been threatening to break through in early trading.

Elsewhere, there was bad news for the Pound yesterday morning, with the release of February’s UK Trade Balance figures, which showed that Britain’s trade deficit had widened from £7.9bn in January to £8.8bn in February. Exports of goods to countries outside the European Union were hit particularly hard, suggesting that the UK is starting to experience adverse effects of a slowdown in the rate of economic activity in Asia.

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