by Adam Solomon
Sterling / Euro and US Dollar
The Pound failed to receive a boost against the majors this lunchtime, after the Bank of England decided to keep interest rates unchanged at a record low of 0.5%. The UK currency remained just above 1.64 versus the Dollar and 1.12 against the Euro before the ECB press conference. The central bank also kept interest rates on hold this month but in the accompanying statement, the chairman Jean-Claude Trichet, gave a strong indication to the market that the governing council will be raising the benchmark lending rate in July.
His hawkish rhetoric on inflation to the upside was followed by the key term that “strong vigilance” is required in order to maintain risks to price stability. Trichet has historically been very transparent on the ECB’s monetary outlook and the Euro has been gaining for the past week on speculation that the central bank would interest rates to 1.25% in July.
Therefore, the Euro hasn’t rallied to a degree that you might expect following the statement, largely because a rate increase has been factored into the market and that is the primary reason the Euro has gained versus the Pound for the past six days consecutively. However, given the inherent weakness in Sterling and the negative sentiment engulfing the UK economic outlook, the Euro may stage a move towards 1.10 over the coming days to test the support level from the previous downside move. The single currency has also had a subdued response against the Dollar following the statement, trading back towards 1.46.