Today it was announced that the BoE left the interest rate unchanged at 0.5%, whilst the ECB announced a quarter percent rate rise to put the eurozone base rate at 1.25%. Given that these decisions were widely predicted, the market response to the news has been somewhat muted.
The ECB press conference was of more interest. Trichet’s comments may not have triggered any significant movements but we do think they could have signalled an end to the euro uptrend that we have seen over the past month. Trichet refused to commit to a further rate rise, adopting a wait-and-see approach. If anything his comments suggested that the rate rise was more at the “once-and-done” end of the spectrum than, the “first-of-several” end.
Significantly, Trichet omitted the phrase “strong vigilance” with regard to monitoring inflation levels, reflective of a less ECB hawkish stance. He certainly reiterated that price pressures would be closely watched, but there’s reason for uncertainty surrounding ECB monetary policy going forward, which contrasts with broad expectations that the BoE will hike rates at least by July.
As well as a broadly euro-negative ECB press conference, the single currency has also come under some pressure today in light of last night’s Portuguese bailout request. Talk of the markets turning their attention on to Spanish debt issues has created a renewed air of uncertainty around the eurozone’s fiscal problems. We have held the view over recent weeks that the euro is overvalued and today’s announcements appear to have given further credence to this view.
In other news, Japan’s misery continues as another earthquake strikes the northeast of the country. It’s fortunately not on the same scale as last month’s quake so we can be hopeful that there’ll be considerably less devastation caused. Global stocks have fallen on the news but the currency markets remain as yet unpeturbed.
Richard Driver
Analyst – Caxton FX
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