Poor domestic data from the Eurozone and mixed comments from ECB policy makers saw the Euro finish the week slightly lower against the Pound.

Eurozone PMI (Purchasing Manager Index) showed that service sector growth rebounded marginally but manufacturing sector PMI fell back towards the 50 figure (a reading of 50 is the divide between growth and contraction) and is at a 31 month low. A member of the German IFO research institute said last week that “negative forces from the oil prices, the euro and financial crisis are starting to have an effect”. He also added that companies in Europe are now expecting the financial crisis to have an impact on the real economy.

Comments from ECB policy makers were mixed last week with some members on Tuesday suggesting that unless inflation levels start to slow there could be further increases in interest rates. This sent the Euro to a new record high above 1.60 against the Dollar. However, other members spoke last week with more calming tones saying that it would be very difficult to raise interest rates despite rising inflation. There were also warnings about the implications of the Euro getting too strong against the Dollar.

This divide over Eurozone monetary policy will only stand to increase uncertainty and unsettle the Euro. European governments are more concerned over weaker growth and the strong currency, yet the ECB is remaining tough on inflation. We do not expect the ECB to raise interest rates for the next few months as manufacturing data suggests that activity is starting to slow, and inflationary pressures mean cutting rates is out of the question for now. Against the Pound though we expect that the GBP/EUR cross will remain low and continue trading between 1.20 and 1.26 for the time being.