Forex - Euro supported against dollar on diminishing ECB rate cut hopes
Tuesday, April 27, 2004 9:41:20 AM
afxpress.com
LONDON (AFX) - The euro was supported against the dollar as expectations of a rate cut by the European Central Bank diminished further following yesterday's unexpected recovery in German business confidence in April
"The strong German Ifo index has eclipsed ECB rate cut expectations for the time being and while near-term pressure on the euro from this angle should relent, this is unlikely to carry it much higher against the dollar," said Michael Klawitter, currency strategist at WestLB
Ifo's main index rose to 96.3 in April from 95.4 in March against expectations of a decline to 95.3, raising hopes that Germany may not require a monetary stimulus after all. However, Klawitter said revisions to the economic growth forecast by Germany's six leading research institutes should as a reminder than another ECB rate cut, probably in June, is not off the cards, This afternoon's testimony by the ECB's president Jean-Claude Trichet to the European Parliament's economic and monetary affairs committee will be closely monitored for any comments about the state of the German recovery, and whether lower borrowing costs will be needed to give it a lift
By contrast, confidence surrounding the US economy is more solid following a raft of positive data, particularly surrounding the outlook for jobs
That has led the markets to increasingly price in a US rate hike from the current 46-year lows of 1.00 pct, by late summer
Yesterday, the euro pushed down to a new five-month low of 1.1764 usd on expectations that the rate differentials will narrow, with the Fed raising rates and the ECB cutting them from their current 2.00 pct
However, Steve Pearson, chief currency strategist at HBOS, noted that the easiest dollar gains may have already been made as sentiment switched suddenly to a possible US rate hike
"As such it is questionable how much further support the dollar can garner from this source absent another monster payroll print," he said
It was the US employment report at the start of this month that turned rate sentiment in the US around. The 308,000 monthly improvement raised hopes that the US economic recovery was finally translating itself into solid jobs growth
The US economic highlight today is the Conference Board's monthly survey into consumer confidence, which is expected to increase slightly to 88.7 in April from 88.3 in March
In addition, market participants will also monitor speeches from Federal Reserve chairman Alan Greenspan and Fed governor Susan Schmidt Bies
Sterling also remained buoyed by rate hike expectations following hawkish comments at the weekend from Paul Tucker, a member of the Bank of England's rate-setting monetary policy committee
The markets had put a question mark over the May rate decision after it emerged that the MPC voted 8-1 in favour of holding rates at 4.00 pct at the April meeting and first quarter GDP growth disappointed at 0.6 pct
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