by Adam Solomon
Sterling / Euro and US Dollar
The Pound rallied modestly against the Euro as the Bank of England kept interest rates on hold at 0.5%, while Portugal’s request for financial assistance weighed on demand for the Euro. However, the UK currency slumped for the first time in five days against the U.S Dollar, but remained within a cent of a two-week high. The outcome of the BoE interest rate announcement was widely anticipated but next month the MPC will know how the economy performed in the first quarter of the year and whether the recovery is strong enough to incorporate an increase in borrowing costs.
With inflation currently at 4.4%, more than twice the government’s target, it is clear that the BoE will raise interests rates at some stage over the coming months and speculation will intensify of the timing of any potential increase. The European Central Bank pressed ahead and increased their benchmark lending rate by 25 basis points this afternoon, the first rate hike in almost three years. The renewed concern over the structural vulnerabilities in the Euro-zone following Portugal’s bailout request has taken some of the positivity away from the rate increase.
In the accompanying press conference, the chairman Jean-Claude Trichet indicated that the governing council was still undecided about further rate increases and the absence of a hawkish rhetoric also undermined the Euro. Money markets anticipate two further rate hikes over the course of the year, but the focus may now switch to the Bank of England and the possibility of a May increase.