Exchange Rate News Flash- Euro declines after Trichet adopts dovish stance

by Adam Solomon

Sterling / Euro and US Dollar

The Pound has made unlikely gains against the Euro today, despite the drop in UK services sector growth, which preceded the Bank of England’s decision to hold interest rates at a record low 0.5%. Sterling rose towards 1.1180 versus the Euro, after the ECB Chairman Jean-Claude Trichet delivered a dovish stance on economic growth and failed to indicate that further rate increases are likely.

Trichet also warned that the economic outlook is uncertain and he refrained from the reference that strong vigilance is required to maintain risks to price stability in his opening statement. The Euro immediately came under renewed selling pressure, falling back towards 1.4720 against the U.S Dollar. Investors were hoping that Trichet would use the press conference to deliver a hawkish rhetoric on inflation and signal a further increase in rate in June.

The dovish tone of the statement was a surprise to investors and the Euro lost ground against the majority of the 16 most actively traded currencies. For the Pound, this will probably be a short reprieve, as the ECB are still likely to increase borrowing costs again before the Bank of England. A report in the UK this morning showed that services sector growth slowed by more than forecast in April and the data follows further declines in construction, manufacturing and housing this week. Euro buyers would be well placed to take advantage of the mini-revival this afternoon because a move under 1.10 still appears increasingly likely.