Interest rate day has finally arrived with both the Bank of England and the European Central Bank announcing their interest rates decisions this morning. Whilst the European Central Bank is expected to raise rates up to 1.25 percent to tackle inflation, the Bank of England is expected to hold rates at 0.5 percent to protect the economic recovery. This difference in approach has been spurring on Euro strength over recent weeks. Although an interest rate hike typically strengthens a currency, it is also important to remember that much of this is pre-emptive and the Euro has already soared throughout the last month. With Portugal now announcing their request for a bail-out from Europe, time will tell how long the rate hike can sustain Euro strength and how much impact sovereign debt problems of the weaker Euro-zone nations will have.
Pound Sterling – UK Markets
The Pound has dropped against the Euro in the run up to the interest rate decision from both economies later this morning. It has picked up against the Dollar however shrugging off weakness caused by poor manufacturing and industrial production data yesterday.
The Bank of England is widely expected to hold interest rates at 0.5 percent today with patchy data of the past month and dire confirmed fourth quarter GDP unlikely to convince the remaining monetary policy members to vote in favor of a rate hike.
Although we will not know how the split in voting between members occurred until the minutes appear in two weeks time, a rate rise in Europe is likely to consolidate the Euro’s recent strength.
US Dollar – US Markets
The Dollar has suffered predominantly downwards movement as Sterling and the Euro take centre stage with today’s focus on interest rates – particularly with little US key data on the economic calendar for this week.
Initial and continuing jobless claims data is released later this afternoon although should Europe raise rates, this is likely to be overshadowed by the move. We may see the Dollar weakening should funds flow into the single currency as Europe raise rates.
Euro – European Markets
Despite the news that Portugal have asked Europe for a bail-out, the Euro has continued to strengthen as the long-awaited interest rate rise is expected to occur from the European Central Bank later this morning.
It is widely expected that rates will increase for the first time in three years from 1 percent to 1.25 percent. Policy members and Trichet have made public comments to suggest that this will happen today so the move has been widely expected for a while now. To some extent this has already been pre-factored in by the Euro as is evident by euro strengthening seen over the past weeks.
The impact of the Portuguese finance minister revealing that the nation will need help from European funds may begin to show more impact over the coming days once the European interest rate decision is out of the way. It is estimated that Portugal will need an €80billion bailout.
Other Currencies – Highlights
The Canadian Dollar has risen to its highest level in more than three years against the US Dollar as demand for commodities and higher yielding currencies accelerated.
Oil, which is Canada’s biggest export, soared as rising inflation spurred demand. This was the eight consecutive day that the Canadian Dollar strengthened.