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ECB hikes rates; euro higher on monetary policy outlook

Last week, on Thursday, the European Central Bank raised interest rates by 25 basis points to 1.25 per cent as was widely anticipated by markets. This marked the first time since July 2008 that the ECB raised its “refi” rate. In the news conference following the interest rate decision, ECB President Jean Claude Trichet said that although the pace of monetary policy remains moderate it is gradually picking up.

Mr Trichet continued by saying that the Governing Council is constantly monitoring inflation and that from the data collected so far in 2011, higher inflation is mostly attributed to the rise in commodity prices. Finally, he said that the monetary policy decision was taken anonymously, while a decision is yet to be taken about future rate hikes.

EUR/USD has traded up from 1.4243 to a 15-month high 1.4518 since the ECB rate decision by the time of writing. At the beginning of the week, the single currency had relinquished some of its gains versus the US dollar on increased risk aversion as a series of earthquakes hit Japan and prompted more tsunami alerts, which were later dismissed.

The euro remains supported despite insisting periphery debt concerns which continue to haunt the European bloc.

The International Monetary Fund confirmed over the weekend that Portugal has asked for financial assistance. The IMF said that they are “prepared to move expeditiously” in response to Portugal’s aid request.

Despite debt concerns the euro is expected to continue to be supported by interest rate expectations especially should the Federal Reserve, through its key officials, maintain its dovish stance.

On Monday, two high ranking Federal Open Market Committee (FOMC) members William Dudley and Janet Yellen, respectively New York Fed president and Fed vice-chairman, said that the US central bank should stay the course with regards to its quantitative easing program, more commonly known as QE2, and that inflation is not yet a major threat while unemployment remains high.

A rising channel off February lows is still intact in EUR/USD with upside targets now being represented by 2010 highs at 1.4580, with a break of this level exposing further gains towards 2009 highs. RTFX TraderTip for the pair suggests a rise to 1.4565 this week before a potential retracement.

Sterling rose to 15-month highs versus the greenback at the back end of last week on stronger than expected producer inflation data, but retraced its gains at the beginning of the week.

Cable was down versus the single currency and the greenback as prospects of a Bank of England rate hike as early as May diminished.

The notion that the BoE will remain on hold for the time being was further supported on Tuesday, as CPI data from the UK was considerably below consensus. The drop in CPI marked the first decline since July 2010. The figures should provide MPC members with some peace of mind that inflation is not growing out of hand, although it remains double the target rate of two per cent.

EUR/GBP hit a five and a half month high on Tuesday following the release of CPI figures. The pair rose to a high of 0.8902 by the time of writing and now has the 0.9000 barrier well in its sights. Sterling was down by an average 0.80 per cent on the week on Tuesday, with its largest losses recorded against the Swiss franc and the yen where it is down 1.70 and 1.30 per cent respectively. Cable is also down 0.75 and 0.40 percent versus the euro and the dollar.

RTFX Trend is bullish on EUR/GBP, while TraderTip scenario for the month predicts the continuation of the rally to 0.8970 as long as support at 0.8716 holds.

The Swiss franc and Japanese yen were well supported at the start of the week, while commodity linked currencies lost some steam, as risk sentiment was dented following a series of earthquakes in Japan and after Japan raised the severity of the nuclear disaster in Fukushima to seven, placing it on par with that of the 1986 Chernobyl disaster. The uptick in risk aversion and a drop in crude oil prices induced by hopes of a ceasefire in Libya prompted a sell-off in higher-yielding currencies, while “safe-haven” currencies were favoured.

The Swissie was up by 1.30 per cent on the week against its major rivals, while the yen was also higher by an average of almost one per cent. However the yen remains down on the year by an average of 6.70 per cent, especially against riskier bets such as the Aussie, euro and cable, where it is down 6.75, 12.05 and 8.30 per cent respectively.

Upcoming FX key events:
Today: Swiss ZEW Index & US PPI.
Tomorrow: EZ HICP, US CPI & US Michigan Consumer Sentiment Preliminary.

FX technical key points:
EUR/USD is bullish, target 1.4600, key reversal point 1.3400.
EUR/GBP is bullish, target 0.9000, key reversal point 0.8500.
USD/JPY is bullish, target 88.00, key reversal point 81.50.
GBP/USD is bullish, target 1.6500, key reversal point 1.5800.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on [email protected].

RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

www.rtfx.com

Mr Xuereb is a trader at RTFX Ltd.

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