The Euro strengthens against the Pound after several members of the ECB’s governing council announce the need for higher euro-zone interest rates


By on June 27th, 2006.
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Following a relatively quiet day in terms of economic data released, the Euro made further gains against the majors after several members of the European Central Bank publicly gave their support for a further tightening of monetary policy before the next scheduled rise in August. In the past 24hrs, two members of the ECB’s governing council have declared that global inflationary pressures will force the central bank to lift euro-zone interest rates above the current 2.75% with Yves Mersch enforcing the view that the ECB may raise rates by upto 50 basis points. There was increased speculation that the ECB would adopt the same policy in their June announcement and as we know when Jean Claude Trichet adopted a more cautious approach and lifted interest rates by just 25 basis points, the Euro was severely weakened, trading upto 1.4650 against the Pound. However, as a result of these comments the Euro firmed 0.3% against the Dollar and was also up by 0.3% versus the Pound at the close. There is some significant data released this morning in the Euro-zone with the German ifo Business climate index, which is expected to continue showing signs of growth in June with the staging of the World Cup likely to provide a timely boost.

The negative sentiment surrounding the Pound has continued in the beginning part of this week with the Hometrack House Price index rising 0.8% in June, which was largely in line with expectations but it seems higher unemployment and rising energy costs are having a negative impact on the housing market with UK mortgage approvals set to drop significantly in May. There is a sparse supply of important data released until Wednesday this week with the CBI Distributive Trades Survey, which is widely expected to show further signs of growth in high-street trade this month and will add weight to calls for higher UK interest rates.

The Dollar’s recent surge against Sterling continued yesterday after sales of new homes in the U.S unexpectedly rose to the highest level this year in May as prices tumbled in a market saturated with unsold homes. Purchases increased by 4.6% to an annual rate of 1.234 million, which was well ahead of market expectations and as a result the Dollar briefly pushed under 1.8200 against the Pound. The Federal Reserve has always monitored the U.S housing market closely and this figure will do little to ease concerns that rising interest rates are having a cooling effect on the market. There is some significant data released this afternoon in the States with U.S Consumer Confidence widely expected to decline further in June as a result of higher petrol prices and slowing economic growth. In addition, Sales of Existing Homes will provide a more complete picture of the U.S housing market and forecasters are predicting a slight decline in the figures released for June.

Data Released 27th June

GER 10:00 ifo Business Climate Index (June)
GER 10:00 Consumer Confidence (June)

U.S 13:30 Existing Home Sales (May)
U.S 13:00 Consumer Confidence (June)

written by Adam Solomon

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