Forex Reader

The euro was little changed, as investors did not panic over the slowdown in money supply in the euro zone. The forex trading was slow because of the public holiday in the UK. The data is not expected to change the course of interest rates in the euro zone over the rest of the year. The European Central Bank is scheduled to decide on interest rates, but is expected to hold fire after having raised the benchmark rate from 2 to 3 pct since December 2005. The rate-setting meeting should prop up the euro. However, it will take additional news from the US for the single currency to sustain bigger gains on the dollar.

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A strong showing by the euro helped prop the South African rand as it struggled among other emerging market currencies. Though South Africa has strong financial markets and well-established trade links with Europe, the rand at times falters between the euro and other emerging currencies. Any increase in the interest rates in the United States was expected to result in the weakening of the rand, but losses were limited as the Federal Reserve halted hikes. The rand’s losses against the dollar were balanced by the strong appeal of the euro which the rand often follows. Reuters Today reports:

Interest rates in South Africa are widely expected to rise to quash inflationary pressures after two 50 basis point hikes since June.

The euro traded on a softer note as investors became cautious following the currency’s failure to make gains last week. Now the European Central Bank is expected to raise borrowing costs in a more aggressive manner. The euro will find it difficult to receive support via a further rise of rate expectations. There have been expectations of a rate hike in early August. However, that did not happen. According to sources, the Central Bank will continue to exercise strong vigilance concerning potential inflationary risks in the euro zone. The positive signal comes from the fact that economic recovery gathers pace and oil prices remain high.

According to Life Style Extra -

Expectations of a Fed rate hike in August diminished substantially to around a 65 pct probability when the Fed’s policy-makers recently published a relatively dovish statement alongside its decision to lift its key Fed funds rate a quarter point for the seventeenth consecutive occasion to 5.25 pct.

The euro recovered from its previous losses after the latest euro zone survey revealed the highest level of manufacturing activity in the coming years. The euro zone manufacturing PMI index soared to 57.0 in May from 56.7 in April. This is the highest level since August 2000. The euro zone inflation grew stronger in view of the speculation that the European Central Bank would hike the interest rates by 50 basis points. Earlier, the euro slipped sharply against the US dollar. However, it gained the lost ground at a later stage. Forbes has published an article on the Same Topic.

The Federal Open Market Committee expressed concern about rising inflation and inflation expectations, with several members commenting that core inflation ‘was now around the upper end of what they viewed as an acceptable range.