Currency Update – Friday

Currency Update – Friday

It's hard not to feel sorry for ECB members as all the hard work they've put in since the last meeting, constantly telling everyone that this month's rate hike wouldn't be the start of a hawkish hiking cycle, seems to have been wasted as the markets reacted to the ECB's neutral stance by heavily selling the Euro. The decision to raise rates by 25bp was hardly unexpected, but the post match press conference did surprise many, although maybe it shouldn't. Trichet said the hike was designed to prevent a wage/cost spiral fuelled by inflationary expectations, but he also implied that there would be no further bias towards rate hikes and that they would 'continue to monitor closely all developments over the period ahead.'. This has caused the markets to reappraise their views on the Euro, and caused the single currency to drop 2c against the US dollar down from 1.59, to 1.57. The Pounds also reversed some of it's losses over the week against the Euro climbing back above 1.26.

The Dollar's 2c gain against the Euro was not just down to the ECB's neutral bias, but also due to some of America's own economic data. With today being US Independence day the usual Friday employment data was released yesterday, and was expected to show a large drop. The actual figures did show a large drop, but not as large as many thought. The payrolls dropped by 62k (40k better than estimates), and there was the usual revisions to the previous months' figures, this time downwards. There was also weak data out in the form of the ISM non-manufacturing survey which slipped out of numbers showing expansion. However the markets seemed to shrug off the bad data and the Dollar climbed against Sterling dropping the GBP/USD rate down from above 1.99 to just above 1.98.

The US celebrates it's defeat of the British today, so the markets will be relatively quiet. There is little data of note out, so the markets are likely to continue to mull over the ECB's rhetoric from yesterday. One comment from Trichet should give everyone pause for thought, as it augurs a shift not just in global economics, but politics also; he said that 'the shift in relative prices and related transfer of income from commodity-importing countries to commodity-exporting countries have to be accepted. They require a change in the behaviour of companies and households.' and although he didn't mention it, maybe nations also.

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