Last week we saw the GBP/EUR rate drop over 2 cents from Interbank levels of 1.3477 on Monday morning to an opening level this morning of 1.3259. this drop was due to British annual house price inflation dropping to a 22 month low and also Eurozone PMI posting much higher than market consensus on Thursday. The MPC minutes from the last Bank of England interest rate cut also helped to weaken the rate as we saw 8 out of 9 members vote in favour of a 25 basis point cut with the remaining member looking for 50 basis points to be cut.

On Friday we also saw data showing French inflation rose to its fastest annual pace in at least 11 years. From this we saw markets pricing in a 25% chance of a June cut in Eurozone interest rates, down from the 100% chance that had been priced in the week before. The ECB are having to deal with slowing economic growth at the same time as rising inflation and will face some difficult decisions about their monetary policies over the coming months.

This week we will see Trichet speaking and we will be watching to try and gauge the direction of the ECB from his tone. The data calendar is a bit light in Europe so markets will be watching both the UK and US for economic data. The UK has January mortgage approvals (a good forward looking indicator) and February house price surveys from the Nationwide which are expected to weaken the rate so we may see the GBP/EUR cross challenging the 1.32 level, and with the US data looking as though it will remain weak we could see the EUR/USD rate pushing 1.485.