The extent to which the market has priced in a rate rise from the European Central Bank (ECB) on 7 April could leave the euro vulnerable to a correction, reports Caxton FX, ahead of the latest eurozone inflation figure which is due 31 March 2011.
The ECB looks set to shift interest rates owing to the level of inflation, which has been running above their near 2% target for the past three months. In the unlikely event that the latest eurozone wide inflation figure undershoots expectations, the euro could stumble.
Duncan Higgins, senior analyst for Caxton FX, said: “In the very near term, the inflation data presents an event risk for the euro. If there are signs that rising prices are not the threat suspected, then the market is liable to pare back its expectations for a rate rise.”
Higgins also believes that the euro is set to struggle following the ECB’s decision: “Following the rate rise on 7 April, I expect to see the euro to come away from its highs. Already the euro is struggling for further momentum – the support it has garnered from the prospect of a rate hike has been completely priced in. Following the date, the market’s focus will likely shift elsewhere and the debt crisis is a prime candidate.”
Richard Driver, analyst for Caxton FX, concluded: “With the ECB almost certain to tighten policy next week, an interest rate fever has taken over the market throughout March. With a Fed rate rise nowhere to be seen, and a Bank of England rate rise highly unlikely to come before June, the euro has soared. However, following the ECB’s decision, the markets may wise up to the effects of the rate rise on peripheral states, which are already teetering on the edge of economic failure.”
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