Wednesday, 23 Feb 2011

Pound and Euro Gain on Rate Increased Interest Rate Expectations

Both the pound and the euro were trading higher in today's morning trade after the release of the Bank of England Monetary Policy Committee meeting minutes showed additional support for a BOE interest rate hike. Market volatility was noticeably lower as opposed to yesterday's large price swings as traders continue to absorb geopolitical events in both the Middle East and in New Zealand.

Today the BOE MPC meeting minutes showed BOE Chief Economist Dale Sentence joined in support of an interest rate hike during the last MPC meeting. This brings the number BOE MPC members who are in favor of an interest rate hike up to 3. The market is currently pricing in expectations for an interest rate increase in May.

Upon the release of the voting results the GBP/USD rose to a high of 1.6270. The Cable has been capped by a narrowing range that has held since January 2009. A breach above this level would initially target the mid-January high of 1.6450. Support is found at yesterday's low at 1.6000.

Yesterday ECB members Yves Mersch and Nout Wellink both commented on the need for interest rate hikes in the European Union to fight rising inflation and for a return to the normalization of monetary policy. These comments have provided support for the euro versus the dollar. Interest rate futures have also began to price in a rate increase, moving up expectations for a rate increase to the ECB's August 4th meeting from September.

Currently the EUR/USD is testing the 1.3750 resistance level and looks to move higher. The 50-day moving average line is crossing above the slower moving 100-day moving average which hints at further moves higher for the pair. Resistance is the February high of 1.3860. Support comes in at 1.3540 off of the rising trend line from the mid-February low.

Both ECB President Jean-Claude Trichet and outgoing Bundesbank President Axel Weber will be speaking this afternoon. European central bankers have given a number of hawkish speeches lately and Trichet may try to talk down the inflationary pressures in the EU and the market's increasing expectations for an interest rate hike.

US existing home sales are also due up at 15:00 GMT.