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GBP-EUR high inflation must be taken seriously
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Monday, 21 July 2008 |
The euro appreciated a little against the pound last week, despite concerns over inflation and growth in the Eurozone. These gains have only really been the result of anti-dollar flows.
Trichet stated that the risks to growth were to the downside and the Euro is likely to be weak in Q2 and Q3, before staging a recovery. Trichet also said that the risk of permanent knock-on effects from high inflation must be taken seriously and prevented. Joaquin Alumina, the EU's monetary affairs commissioner, on Friday said Inflation in the euro zone may drop to close to 2% next year, but there is still a risk of stagflation.
There were further warnings over euro-zone economic growth last week, with poor data again reinforcing fears of stagflation. The widening trade deficit is of particular concern as it shows that the strong euro is making life hard for exporters. This is likely to add further pressure on the Eurozone economy. Furthermore, last week’s German ZEW index (which monitors investors' confidence in Germany) shows market participants are at unease over the Eurozone’s largest economy’s outlook.
The inflation data, although in line with expectations, is a concern as the longer inflation remains elevated, the longer it will take to recede and hence the greater chance of second round effects which the ECB are so desperate to avoid.
As for the cross, there remains a concern over economic growth and inflation in both the UK and Eurozone and we expect rates in both to remain on hold in the near term. It is therefore expected that the cross may remain between 1.22 and 1.27 in the short term, but with a slight bias to the downside in the medium term due to the weaker outlook for the UK.
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Specialists in Foreign Currency Transactions, 
