BofE and ECB interest rate decisions tomorrow – non event?

GBP EUR Exchange Rate: Weekly Review July 16  

Personally I think both interest rate decisions tomorrow are likely to be a relative non event – the ECB (European Central Bank) are very unlikely to raise rates (although admittedly there is a small outside chance) and the BofE (Bank of England) even less so.

However this doesn’t mean to say that the markets will be flat tomorrow – in fact far from it! The rates are particularly volatile at the moment considering the debt issues in Europe and the recently resolved issues in the US (at least for the meanwhile!) and this could be stoked by the hawkish Trichet. Trichet has a habbit of coming out with very aggressive comments in regards to fiscal policy and has led the call to raise interest rates (which has already happened twice in Europe this year). If Trichet states that they will take ‘strong vigilance’ towards inflation the markets will begin to price in another rate hike next month and the Euro is very likely to strengthen as a result.

Although I actually forecast that Trichet will adopt a ‘wait and see approach’, in which case rates are likely to remain fairly steady. Despite sovereign debt issues in Europe the interest rate in Europe is now 1% more than in the UK, if you had to ask any currency trader the two main data sets that share a correlation to strength / weakness with currency pairs they would most likely say Interest Rates and GDP and probably in that order.

This is a principle reason why GBP/EUR still remains at good levels for the Euro despite sovereign debt and this is due to the interest rate differential. It is a very difficult one to predict at the moment and the dealers on the trading floor are split near 50/50 to whether GBP/EUR will end up or down at the end of this year, which shows just how turbulent the times really are.

If you have a currency requirement then do not hesitate to get in touch to make sure you know all the options that are available to you that will help you to make the most of aggressive market movement. You can contact the author directly (James Matthews) on 01494 787 451.