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Thursday February 7, 2008 - 13:29:09 GMT
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FOREX NEWS-Pound eases after BoE cut, euro eyes Trichet

Thu Feb 7, 2008 8:09am EST

(Changes byline, recasts with BoE and ECB, updates prices)

By Toni Vorobyova

LONDON, Feb 7 (Reuters) - Sterling fell after a widely expected UK interest rate cut on Thursday, while the euro weakened on expectations that an on-hold rate decision from the European Central Bank would be followed by dovish rhetoric.

The focus now switched to ECB President Jean-Claude Trichet's news conference at 1330 GMT, where some expect him to take a more dovish stance -- perhaps by giving more weight to softer growth than to price pressures, or by saying policymakers discussed the possibility of a rate cut.

The euro has been under pressure this week after surprisingly weak euro zone service sector data on Tuesday fuelled expectations the ECB might have to bring forward any rate cuts from the current 4 percent to shore up growth.

"The feeling is that the risk is very asymmetric to the downside for the euro," said Adam Cole, global head of FX currency strategyat RBC Capital Markets.

"The hawkish rhetoric (from ECB) is just looked through, whereas if there's any hint that their emphasis is moving to looking at the downside risks to growth, that will prompt a very large market reaction."

By 1248 GMT, the euro was down 0.4 percent at $1.4571 <EUR=>. It has lost around 1.25 percent so far this week, heading for its biggest weekly fall in nearly two months.

Versus the Japanese currency, the euro fell around half a percent to 155.23 yen <EURJPY=>.

Against a basket of major currencies, the dollar edged up 0.3 percent to 76.361 .DXY.

Sterling fell to a two-week low at $1.9461 <GBP=> after the BoE administered a widely expected 25 basis points rate cut to 5.25 percent in a bid to head off a sharp consumer-led slowdown and signalled that further gradual monetary easing was in the pipeline.

"In all, despite the BoE's need to 'balance the risk', we doubt that the inflation outlook will prevent the BoE from cuttinG UK rates in a measured and timely way, i.e. at a 25 bps per quarter pace through this year," ING said in a research note.

TRICHET SPEECH KEY

In contrast to the United States, Canada and Britain, the ECB has not yet gone down the path of cutting interest rates because of price pressures in the 15 countries using the euro. In January, euro zone inflation hit a record high.

But recent signs of faltering growth in Spain, Italy and elsewhere in the bloc suggest that the ECB may soon have to switch its attention to supporting the economy.

"Our focus will be on whether Trichet concedes that the outlook for slower global growth will reduce upside CPI risks and/or if he states that the Council considered all options, including an easing, which would shift the bias toward neutral," said analysts at Calyon.

"The latter in particular would hint at a rate cut before the June move, which we currently forecast, and prompt a sell off in EUR/USD," they said in a report.

Should Trichet stick to the hawkish script, the euro will likely benefit, but given expectations that the ECB will eventually have to lower rates, any boost to the currency should prove short lived, Calyon added.

On the other side of the Atlantic, Thursday's calendar features weekly U.S. jobless claims at 1330 GMT and December pending home sales at 1500 GMT.

Going into the weekend, investors will be looking to any currency-related comments from the meeting of Group of Seven finance ministers and central bankers in Tokyo.

A G7 source told Reuters on Thursday that the wording of this weekend's communique is not yet finalised with regards to FX but no change is expected from October's text.

Back then, the communique singled out only the Chinese yuan currency as being too weak, despite European concerns about the rise of the euro.

(Editing by Ruth Pitchford)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

 

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