Forex - Euro climbs further on inflation fears, focus shifting to FOMC
LONDON - The euro climbed further against the dollar, supported by hawkish comments from European Central Bank board member Lorenzo Bin Smaghi and stronger-than-expected German producer prices. The ECB’s Bin Smaghi wrote in the Financial Times that commodity prices will continue to rise and that further interest rate rises will be needed unless technological developments and wage discipline don’t bring inflation down.
“Experience has shown that if inflation is left to creep up, the cost of bringing it down later will be even higher: the central bank must ultimately act if this is what is needed to maintain price stability,” he wrote.
European Central Bank officials have recently tried to downplay speculation there will be further interest rate hikes after the widely-anticipated one next month. But with inflation in the 15-nation single currency zone showing no sign of abating, markets are now anticipating borrowing costs will be raised at least twice before the end of the year.
This view was strengthened by figures showing producer prices in Germany rose by 1.0 percent in May from April, and were 6.0 percent higher than a year ago. Analysts had expected a 0.8 percent increase month-on-month and an annual rise of 5.7 percent.
“Punchy inflation readings in the euro zone, including this morning’s German PPI data, make it hard for the market to forecast other than at least a couple of rate hikes if the ECB continues to stress its mandate to maintain price stability,” said Daragh Maher, currency strategist at Calyon.
Meanwhile attention is now turning to next week’s U.S. interest rate decision. The Federal Reserve’s Open Market Committee is widely expected to leave borrowing costs on hold, but all eyes will be on the accompanying statement to see whether rates are set to rise in the coming months.
“Expectations that at next week’s FOMC meeting Fed Chairman Bernanke will fuel Fed rate hike expectations, which have been cut back during the week, could lend the dollar a helping hand,” said Antje Praefcke, currency strategist at Commerzbank.
For today though, a lack of data means there is unlikely to be any fundamental changes in currency trades. “With little high profile data due for release from either the euro zone or the U.S., it’s going to be a case of posturing and perhaps trying to book in some profits that will provide the direction ahead of the weekend break,” said Vin Hoston, head of sales trading at SigmaForex LTD.
Elsewhere the pound continued to rise on the back of yesterday’s record retail sales figures. Sales rose 3.5 percent in May from April, the fastest rate of growth since figures began in 1986. The data has prompted speculation the Bank of England may have to raise interest rates despite a slowdown in other parts of the economy as it attempts to bring inflation lower.
The news meant sterling recovered losses triggered after Bank of England governor Mervyn King’s letter to Chancellor of the Exchequer Alistair Darling on Tuesday to explain the rise in CPI inflation above 3.0 percent dampened rate hike expectations.
“As a result, the pound is now edging towards 1.9750 dollars and with the recent rate of appreciation we’ve seen, the question has to be asked once again whether there’s scope to see a return to 2 dollars to the pound,” said Thomson at CMC Markets.
“Experience has shown that if inflation is left to creep up, the cost of bringing it down later will be even higher: the central bank must ultimately act if this is what is needed to maintain price stability,” he wrote.
European Central Bank officials have recently tried to downplay speculation there will be further interest rate hikes after the widely-anticipated one next month. But with inflation in the 15-nation single currency zone showing no sign of abating, markets are now anticipating borrowing costs will be raised at least twice before the end of the year.
This view was strengthened by figures showing producer prices in Germany rose by 1.0 percent in May from April, and were 6.0 percent higher than a year ago. Analysts had expected a 0.8 percent increase month-on-month and an annual rise of 5.7 percent.
“Punchy inflation readings in the euro zone, including this morning’s German PPI data, make it hard for the market to forecast other than at least a couple of rate hikes if the ECB continues to stress its mandate to maintain price stability,” said Daragh Maher, currency strategist at Calyon.
Meanwhile attention is now turning to next week’s U.S. interest rate decision. The Federal Reserve’s Open Market Committee is widely expected to leave borrowing costs on hold, but all eyes will be on the accompanying statement to see whether rates are set to rise in the coming months.
“Expectations that at next week’s FOMC meeting Fed Chairman Bernanke will fuel Fed rate hike expectations, which have been cut back during the week, could lend the dollar a helping hand,” said Antje Praefcke, currency strategist at Commerzbank.
For today though, a lack of data means there is unlikely to be any fundamental changes in currency trades. “With little high profile data due for release from either the euro zone or the U.S., it’s going to be a case of posturing and perhaps trying to book in some profits that will provide the direction ahead of the weekend break,” said Vin Hoston, head of sales trading at SigmaForex LTD.
Elsewhere the pound continued to rise on the back of yesterday’s record retail sales figures. Sales rose 3.5 percent in May from April, the fastest rate of growth since figures began in 1986. The data has prompted speculation the Bank of England may have to raise interest rates despite a slowdown in other parts of the economy as it attempts to bring inflation lower.
The news meant sterling recovered losses triggered after Bank of England governor Mervyn King’s letter to Chancellor of the Exchequer Alistair Darling on Tuesday to explain the rise in CPI inflation above 3.0 percent dampened rate hike expectations.
“As a result, the pound is now edging towards 1.9750 dollars and with the recent rate of appreciation we’ve seen, the question has to be asked once again whether there’s scope to see a return to 2 dollars to the pound,” said Thomson at CMC Markets.
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