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Sun 17 Oct 2021 07:15GMT

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Euro weak as Trichet stalls in interest rates

The pound is looking to round off the week in a much better position than many market analysts thought following from the contraction in the UK economy by 0.5% according to last week's worrying GDP data.

Activity in Britain's dominant services sector expanded at its fastest pace in eight months in January as business recovered after December's snow disruption.

Yesterday's purchasing managers' survey from Markit & CIPS also showed a record jump in input cost inflation in the services sector , which may cause concern for Bank of England policymakers who hold their rate decision meeting next Thursday.

Sterling fell away a little from the 3 month high against the dollar, bouncing off the key resistance level of 1.6282, but staying well over the $1.60 price that has proved difficult to break during sterling's turbulent trading pattern since the turn of the year.

Versus the euro however, the pound clung to comments that drove the euro down, as Jean Claude Trichet dampened expectations for a rate hike in the euro zone.

The single currency fell across the board yesterday and has started Friday's trading session with much the same bad news after European Central Bank President Jean-Claude Trichet threw cold water on expectations that euro zone interest rates would rise in the near future.

Trichet spoke after the ECB's decision to keep rates at a record low 1% and stated that inflationary expectations remain "firmly anchored" and inflationary pressures over the medium to long term "should remain contained".

Investors were clearly disappointed, as they were expecting a more hawkish statement after recent inflation data came in above forecast. It was thought that the ECB would lift interest rates sooner that the Federal Reserve and this had strengthened the euro. Yesterday's news led investors to dump the euro and buy the dollar as the game of cat and mouse gathers pace.

Fed Chairman Ben Bernanke spoke yesterday and said that despite improved US economic data, the economy needs help from the central bank.

Expectations that the recovery is taking hold pushed US 10 year Treasury yields north of 3.55%, above a range that has held solidly since mid-December. Higher bond yields will make dollar denominated assets more attractive.

Market wise, the dollar benefitted from the disappointing news out of Europe that led to rates moving down to 2 weeks lows at around $1.36, and could look to extend these gains as investors are let down by the euro-zone reluctance to entertain the idea of an increase to interest rates to combat inflation, as per Jean-Claude Trichets comments yesterday who stated that current interest rates are "appropriate".

The Japanese Yen continues to cling to the status of safe haven, as investors pull money out of the euro zone and retreat into the apparent harbour of the Yen and US Dollar.

More risk appetite should be expected with numerous central bank's discussing and considering a change t interest rates that may see investors drag their money out and seek riskier ground. On that basis, any buyers of Yen are well laced now to lock in exchange rates.