The Euro rallied against the US Dollar as market attention again turned to a more hawkish European Central Bank. Yesterday, comment by ECB member Yves Mersch honed the markets on the prospect of the ECB moving up their interest rate expectations. The belief now is that the ECB will raise rates this year because of inflationary pressures from higher imports and commodities and the threat that they may stay elevated and become embedded, raising inflation expectations.
The problem is that aside from Germany, can the other European nations – especially those on the periphery – handle higher borrowing costs or could a rate hike that comes too soon short circuit the European recovery. ECB President Trichet speaks later today, and attention will now turn to next week’s ECB interest rate meeting.
The market pricing in the prospect of a rate hike by the ECB overshadowed the concerns over the unrest in the Middel East which dominated a good portion of yesterday’ trading.
Have a look at the EUR/USD from a technical perspective here: EUR/USD’s Sharp Pullback is Challenging the Bearish Momentum
In the UK meanwhile, we saw the most recent vote in the latest interest rate decision, and we had a 3rd member this time voting for a rate increase. That means only 2 more members are needed from the 9-member MPC to go ahead and raise rates.
From Bloomberg: Dale Joins Sentance, Weale in Push for BOE Rate Increase
“Bank of England Chief Economist Spencer Dale joined policy makers Andrew Sentance and Martin Weale in voting for an interest-rate increase as a split widened on the dangers of inflation at double the target.
“For three members, the case for removing some monetary stimulus at this meeting was compelling,” according to minutes of the Feb. 10 decision published today in London. “Of those members not favoring a rise in bank rate, some thought that the case for an increase had nevertheless grown in strength.””
The market is pricing in an interest rate increase for the summer. That release of the Minutes helped to boost the GBP/USD push above our recent highs this week, at 1.6260. The pair’s major hurdle to the top-side is the 1.63 level which we are fastly approaching. A break there would open up the pair to further gains to the topside.
For a technical analysis look at the GBP/USD pair: GBP/USD Forms a Flag Pattern Below 1.63
Or, the GBP/JPY pair: GBP/JPY Testing Support and Bullish Momentum at 134.15