The ECB has delivered on last month’s rate rise promise, taking the eurozone base rate to 1.50%. The Bank of England threw up no surprises today, keeping the UK rate at 0.50%.
In line with expectations, the ECB has gone ahead with the rate rise it signalled last month with the phrase “strong vigilance” in relation to upside risks to inflation. The rate rise is the last thing the struggling periphery needs right now, but the ECB sticks to its price control mandate very strictly.
Despite some strong German factory orders data this morning, there is growing evidence of an economic ‘soft patch’ being experienced in the eurozone, in line with a global trend. It will be interesting to see what this rate rise does to eurozone growth in the second half of this year. Trichet was actually pretty hawkish, stressing that the ECB will continue to monitor eurozone inflation closely. The door was definitely not closed to a third ECB rate rise this year. If eurozone inflation ticks up later this year, you can be pretty sure the ECB will move again, unlike the BoE.
The euro has received a slight boost as a result, concludes Driver:
The market has responded fairly positively to Trichet’s comments as the euro has gained a little traction for the first time this week. The Portuguese debt downgrade headlines have really weighed on the single currency this week, but the ECB’s monetary policy gives the euro plenty of upside potential regardless of peripheral concerns. Sterling has climbed against the euro this week, but gains may prove hard to sustain with UK second quarter GDP likely to an awful figure at the end of this month.
We are bearish on sterling; it will benefit against the euro when these peripheral issues weigh in the short-term, but the absence of UK growth or monetary tightening really is the bottom line. Likewise for the euro, peripheral issues may weigh in the short-term but interest rate differentials and sovereign diversification will continue to spur the euro on.
Richard Driver
Analyst – Caxton FX
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