Shock move by European Central Bank

Published: 04 March, 2011

Sterling fell by nearly 1% against the euro yesterday as poor UK services sector activity sector contrasted sharply with a shock statement from the European Central Bank that the ECB could hike interest rates in the region as early as next month.

Currency rates, March 4:

EURO/GBP - 1.1639
US$/GBP - 1.6245
CHF/GBP - 1.5106
CAN$/GBP - 1.5822
AUS$/GBP - 1.6040
ZAR/GBP - 11.1940
JPY/GBP - 133.87
HKD/GBP - 12.657
NZD/GBP - 2.2016
SEK/GBP - 10.258
US$/EURO - 1.3954

Investors had up until now been pricing in a UK interest rate hike before Europe and the shock move by the ECB saw the euro break back into the €1.16's against sterling. UK Services PMI, which measures the level of activity in the services sector, came in below expectations that left a sour taste in the mouth after an otherwise positive week for UK fundamental data.

In the euro zone, the euro gained by 0.7% against the US dollar as ECB President Jean-Claude Trichet said that "inflationary risks are to the upside" and that "strong vigilance" is required. The possibility of the ECB raising interest rates far sooner than expected has seen the single currency jump against the US dollar and sterling.

In the USA, a proposal by Venezuelan President Hugo Chavez to broker a peace deal in Libya saw oil prices ease off and US stock markets on Wall Street posted gains. Unemployment figures were positive, with the number of claimants for unemployment insurance falling by 20,000 on last week.

Elsewhere, in a research note to clients, Lloyds TSB estimate that the price of oil (currently around $110) could hit $250 per barrel if the situation in the Middle East and North Africa continues which could potentially wipe £45bn off the UK's GDP. We will have to see what happens...

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