The Euro traded fairly sideways in opening trade this morning ahead of Italy and Spain’s bond auctions and the key interest rate announcements from the ECB and the Bank of England. markets also eagerly awaited the ECB press conference and news on monetary policy for the Eurozone moving forwards into 2011.

Markets were not dissapointed, Jean Claude Trichet signalled that inflationary pressures are looming and that he is not afraid to tackle the pressures with a raise in interest rates despite the current struggle to contain the regions current debt crisis.

Price stabillity is one of the key areas that policy makers focus on in the Eurozone and a careful balancing act between inflationary pressure and interest rates is required to maintain price stability. Consumer prices exceeded the target for the first time in more than 2 years in December and are a concern for the Eurozone. Historically as countries emerge from recession they suffer from inflation, the problem lies where any increase in interest rates to combat inflation will hit debt ridden countries such as Greece, Ireland, Portugal and Spain, very hard with higher borrowing costs. This subsequently makes them more likely to default.

The ECB last month said that liquidity measures will remain constant in Q1 and bond purchases will be ongoing. Trichets comments today were aimed primarily at quelling the financial crisis as EU goverments battle with consideration of aid for Portugal, debt buybacks and lower interest rates on rescue loans. Trichet said that the rescue fund would be increased and be made highly flexible.

The currency markets were heavily shaken up with the news with a 1% drop in the GBP/EUR pair and the subsequent pick up in risk appetite seeing GBP/USD rally to 1.57. The markets however remain volatile and unsure.

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”

Best Regards
Luke Zorab
Torfx Currency Dealer