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ECB lowers rate hike expectations
Since reaching a one-year high over the summer, the Euro has been punished in forex markets, due primarily to a less favorable outlook for ECB rate hikes. Previously, analysts were expecting the ECB to raise rates three to four more times, raising the base rate to 4%. Now, however, analysts have revised their models to reflect one to two rate hikes. Forecasts for the Euro have been adjusted proportionately to undo the narrowing of interest rate differentials that Euro appreciation had been predicated on. The Daily News reports:
Steve Pearson at HBOS said the scaling back in rate hike predictions is probably a reaction to the drop in oil prices which should in turn drag euro zone inflation well below the European Central Bank’s 2 pct target rate.
Read More: Euro continues lower as investors rethink ECB rate hike prospects
http://www.lse.co.uk
Forex - Euro continues lower as investors rethink ECB rate hike prospects
LONDON (AFX) - The euro continued to drift lower amid a scaling-back in European Central Bank rate hike expectations, offsetting a fleeting rise after stronger-than-expected German data.
Jamie Coleman at Thomson IFR Markets said the euro has been on the defensive as dealers questioned whether the ECB will be able to match its hawkish rhetoric with as much tightening as the market has priced in.
Most analysts predict only two more rate hikes in the 12-nation single currency area, taking the benchmark refi rate to 3.50 pct from 3.00 pct at present. Previously there had been talk that the base rate will go up as high at 4.00 pct.
Steve Pearson at HBOS said the scaling back in rate hike predictions is probably a reaction to the drop in oil prices which should in turn drag euro zone inflation well below the European Central Bank's 2 pct target rate.
'ECB inflation hawks must be a lot less worried than they were. Softer inflation data will ensure the ECB sticks to gradual, 25 basis point moves,' added Pearson.
The single currency got a modest boost early on when the key German Ifo business climate index eased only a touch, to 104.9 in September from 105 in August. AFX News had predicted a steeper fall to 104.3. The headline index has been easing since it hit a 15-year high of 106.8 in June.
'Given low US yields and better than expected Ifo, dealers were caught particularly off guard by this morning's fresh euro weakness,' said Coleman.
At the same time, talk that Germany has been trying to dissuade the Chinese from diversifying its foreign exchange reserves into euros, also weighed on the single currency.
Looking ahead, the dollar faces a minor test when the Conference Board's consumer confidence index is released. The headline index is seen rebounding to 104 in September from August's 99.6. Falling energy prices have given extra cash to consumers, but the index is still expected to remain below the average level of the first half of the year.
Tomorrow, market attention will be on US durable goods orders and new home sales.
That aside, markets will also be keeping a wary eye on US Treasury Secretary Henry Paulson's meeting with Charles Schumer and Lindsey Graham, the key sponsors of legislation that would impose penalty tariffs of 27.5 pct on all Chinese products coming into the US unless China goes further to revalue its currency.
The pound held steady despite a survey showing that wage deals in the UK remain at subdued levels. Markets are holding steady to predictions that the Bank of England will put up interest rates again in November, to 5.00 pct from 4.75 pct. The central bank hiked the benchmark rate by a quarter point to 4.75 pct in August
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