The euro received a boost last week following a more hawkish-than-expected ECB summit, with President Trichet voicing concerns over inflation at Thursday's council meeting. This, coupled with successful Portuguese and Spanish bond auctions and talk of EU officials looking to increase the size of the European Financial Stability Fund at this week's EcoFin meeting, sparked a broad-based euro rally.
Against the dollar, the euro headed for its biggest weekly gain in almost two years, rebounding from a low of $1.287 on Monday to a high of $1.345. Expectation of higher EU interest rates will provide short-term support for the euro. The key level to watch on the top side is $1.35 (the December high); a break and close above this level targets a move towards $1.38.
The Bank of England also met last week (governor Mervyn King), keeping rates on hold. The market is discounting the possibility of a higher UK interest rate with the futures market suggesting a rate hike by July. Evidence of high price pressures in the UK is fuelling inflation concerns.
EUR-GBP traded back to 85p following Trichet's hawkish comments. We feel this level provides a good entry level to sell EUR-GBP as we believe the Bank of England will be the first of the G3 central banks to raise rates this year.
Vincent Killeen, senior manager, Bank of Ireland Global Markets, tel: 01-6093693