Forex: ECB raises interest rate by 25 basis points

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The much anticipated interest rate decision by the European Central Bank was released as expected, up by 25 basis points from the historic low of 1.00 to 1.25%. This is the first rate hike since July 2008. Despite Portugal’s request on Wednesday for a bailout, the ECB policy-makers did not change their view.

The Eurozone has witnessed rising inflation due to rising prices. The higher interest rate was needed to curb inflation.

ECB President Jean-Claude Trichet will be giving a statement at a news conference at 1230GMT. Investors will listen carefully to determine how hawkish the tone of his speech will be. If he chooses to mention certain key words such as “close monitoring” in reference to price pressures, this will signal a further rate hike later in the year.

After the release of the interest rate, EURUSD dropped some 20 pips from 1.4296 to 1.4275 within seconds. EURGBP dropped some 6 pips from 0.8758 down to 0.8751 and EURJPY dropped over 20 pips from121.76 to 121.52