Forex News – ECB rate hike expectations can no longer lift the Euro

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The Euro fell across the board today after the European Central Bank announced its benchmark interest rate was kept unchanged at 1.25 percent. Even though this was in line with market expectations, and despite a hawkish speech from ECB Chairman Jean Claude Trichet signalling a rate hike in July, investors had already expected this and had already priced this in. Consequently, this left little room for further upside in the Euro.

The main driver behind Euro’s fall was the fact that the ECB said inflation would hold at 1.7 percent in 2012, which was lower than analysts had predicted, suggesting the pace of Euro zone interest rate hikes may be slower than previously thought.

“Trichet uttered the fateful code words ‘strong vigilance,’ preparing the market for further tightening,” said GFT Forex research director Boris Schlossberg.

“However, Trichet also suggested that the central bank expects inflationary pressures to moderate in 2012, leading many market participants to conclude that the action in July may be a one-off event rather than the start of a series of rate hikes.”

With no more hopes in rate hikes, the focus could now shift back to the Greek debt crisis now the much awaited ECB policy meeting is out of the way. Greek debt concerns also weighed on the Euro after Moody’s rating agency mentioned that it would be difficult to imagine private creditors participating voluntarily in a debt restructuring (which was one of the recommendations of the troika to help Greece deal with its debt).

“It feels like selling Euro upticks against the dollar will remain the bias, not least because the expected rate hike signal is out of the way and it is clear that many major decisions on how to navigate the Greek crisis have not been taken in either Athens or other European capitals,” said Alan Ruskin, global head of G10 currency strategy at Deutsche Bank.