Foreign Currency Exchange

Last week the Euro strengthened against the Pound following hawkish ECB comments.

ECB Executive Board member and head of Germany’s Bundesbank Axel Weber said that talk of rate cuts by the ECB is premature amid inflation and that rates could even rise. These hawkish comments saw the Euro strengthen against most of the major currencies. ECB vice president Lucas Papademos echoed these thoughts and mentioned that further rate rises could be needed if high inflation sparked a wage spiral in the euro zone.

Although these comments were made, German Inflation in August slowed by more than expected and the German Business Climate Index (IFO) slipped from 97.5 in July to 94.8 in August, much worse than expected, confirming that the economy is teetering on the edge of a technical recession, defined as two consecutive quarters of negative growth. All of this data suggests that the ECB are likely to cut rates towards the end of this year and it is believed that the hawkish comments by ECB policymakers were purely to deter the market pricing in multiple rate cuts.

Last week the Euro’s movements were largely dominated by hawkish ECB comments. However, for the week ahead, mere data analysis will be replaced by the universal driver - interest rates. The ECB is scheduled to deliver its decision on Thursday and it will come as no surprise that the general market and economist consensus is calling for no change to the benchmark lending rate. However, considering the data that has been released last week, there is a good possibility that Trichet will have to use different terminology at the press conference following the official decision.

As for the cross, outlooks for both the UK and the Eurozone economies look bleak. Therefore, it is expected that the cross may remain between 1.23 and 1.26 in the short term.