Foreign Currency Exchange

The European Central Bank (ECB) raised interest rates yesterday from 4% to 4.25%, its first move since June 2007. The GBP/EUR Interbank rate fell to 1.2520 immediately after the announcement, just two cents over its all-time low.

Since the ECB is mandated to maintain price stability this decision came as little surprise. Data earlier this week showed that inflation in the Euro zone economy had reached an annual rate of 4%, double the upper limit of the central bank's target and the highest figure since records started in 1996.

Prior to the announcement the market had already fully factored in not only this move, but also a further interest rate hike to 4.5% by the year end. These expectations were dampened slightly in the later press conference, with ECB President Trichet noting the continued risks to economic growth and reinforcing expectations that the bank will not look to tighten policy further in the near term given the growth outlook.

The UK currency weakened to lows of around 1.25 against the Euro after the UK data, but regained ground following the ECB press conference. Increased unease over the European outlook will continue to provide some degree of protection to Sterling.