ADVERTISEMENT

Euro rides high on July rate rise speculation

Analysis

The euro hit a six-week high versus the dollar and a seven-month peak against the yen, bolstered by expectations of a European Central Bank rate hike next month.

Prospects of such a move were flagged on Thursday when the ECB left policy on hold at 4% as forecast, but president Jean-Claude Trichet said it was on high alert over inflation and a number of policymakers supported raising rates.

Bets of a July hike were supported further by hawkish comments from his colleagues on Friday.

In a sign that the European economy is taking a stronger euro in its stride, the Sentix group's monthly index of sentiment in the euro area rose to 5.2 from 3.5, its highest level since January.

In contrast, the dollar's yield appeal was hit on Friday by news of the biggest jump in the US unemployment rate in 22 years, to 5.5% in May, denting expectations the Federal Reserve will hike interest rates before the year is out.

“Investment banks have revised their forecasts and are now predicting a rate hike as soon as July as price pressures mean that the ECB will start to tighten rates,” said John Hydeskov, senior FX analyst at Danske Markets in Copenhagen.

“This has pushed up euro/dollar as it combined with the lousy unemployment data (from the US) which was the latest in a stream of really bad data.”

Oil prices also weighed on the greenback, with crude holding within $2 of Friday's record high $139.12 per barrel.

“It seems like there is a strong correlation between the oil price and euro/dollar, with the ECB being more trigger happy when it comes to reaction to prices while the Fed is more concerned about growth,” Hydeskov added.

The euro rose to a six week high of $1.5845, and set a seven-month peak versus the ultra-low yielding Japanese currency at ¥167.15 yen according to Reuters data.

The yen was also pressured against the dollar which rose 0.85 to ¥105.85 yen.

The pound got a rare boost from higher than expected UK factory gate inflation data, but it remained pressured near an all-time low versus the euro as a slew of weak UK data in recent weeks has undermined confidence in the UK economy.

A Reuters poll taken after Thursday's Trichet comments showed a median 47% chance of a July rate hike to 4.25%, compared to the majority expecting that the next ECB move would be a cut in a poll taken a week earlier.

However economists remained more cautious on ECB rate expectations than markets.

“With markets now pricing in 75 basis points of ECB hikes by year end however, we think there is a reasonable chance ECB officials will attempt to calm such speculation,” Commerzbank Corporates & Markets said in a research note.

Further clues on the depth of the US economic slowdown will come with April pending home sales figures.

The calendar also features speeches from ECB Governing Council member Guy Quaden as well as several Fed officials, including chairman Ben Bernanke.

Last week Bernanke surprised markets with a rare warning on currencies, saying the Fed was paying attention to the moves in the dollar and the implications for inflation. (Reuters)

ADVERTISEMENT

Czech economic confidence weakens in November Analysis

Czech economic confidence weakens in November

Lawmakers approve residency permit for digital nomads Parliament

Lawmakers approve residency permit for digital nomads

The strongest move - Morgan Stanley Hungary head and Chess F... Podcasts

The strongest move - Morgan Stanley Hungary head and Chess F...

ITM, capital gov't agree on support for public transport City

ITM, capital gov't agree on support for public transport

SUPPORT THE BUDAPEST BUSINESS JOURNAL

Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.