Euro Rate Hike, Could Happen this Week?

Good Morning.

Following on from last week, the pound has started this trading session with a difficult few hours that have weighed on sterling’s resolve to buckle under the mounting pressures that we have been experiencing, as other central banks enter the rate increase race.

Sterling’s mood was dampened by Friday’s news of a downward revision to Q4 GDP, with news of a 0.6% contraction in economic activity in the closing months on 2010, which has added further complications to the policy outlook for the Bank of England.

The pound is holding up well against the dollar as expectations that Mervyn King tomorrow will, during tomorrow’s parliamentary testimony, hint about when and not if King and the rest of the Bank of England Monetary Policy Committee will decide to raise interest rates with inflation currently twice its target level.

The euro gained heavily against the dollar going into the weekend as market traders took profits on gains seen earlier in the week, the euro regained some ground in overnight trade, holding above the $1.3759 level.

Upside however is seen as limited for now with markets cautious on the Irish general election result and ahead of Thursday’s ECB policy meeting.

Indeed the euro fell to a three week low versus the yen overnight with political turmoil in the Middle East jostling the markets and oil production, prices and distribution being a concern. The US dollar can’t even cling to its ‘safe-haven’ status as it itself is an oil producing country which leaves investors who are wanting to offload their assets being left with few options other than to flood the euro zone.

The Euro was further boosted by comments by the ECB that hinted that they too would look at opting for an interest rate hike to combat inflation, and with the ECB meeting this week to discuss rates, market watchers will be playing close attention to both the BoE and ECB to see who jumps first.