Thursday November 3, 2005 - 11:24:54 GMT
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INVESTICA Ltd - www.investica.co.uk
ECB considers options
The dollar pushed stronger than 1.20 ahead of the New York opening on Wednesday, but was unable to sustain the move and weakened to 1.2075 later in New York as the Euro secured significant buying support. The dollar was trading little changed in early Europe on Thursday, although with a slightly firmer bias.
The Euro gained some support on Wednesday from a closing of long positions in high yield currencies funded through the Euro. In part, this reflects the fact that the markets are increasingly looking for an ECB monetary tightening this year. The Thursday ECB meeting will be important for the Euro and markets in general. A rate increase, on balance, still looks unlikely, but the ECB is likely to signal a rate increase if it is planning to make a move in December. Another difficulty for the ECB is that it traditionally prefers not to change rates in December.
There is, therefore, a 30% chance that there will be a move to increase rates today. Even if rate increases are avoided, there is the potential for a tough line to be taken on inflation. The Euro will be at risk of at least short-term losses if the ECB takes a softer than expected line and fails to increase rates, but there will be at least a short-term Euro spike stronger if rates are increased. The Euro-zone services-sector PMI index was uninspiring with a small increase to 54.9 in October from 54.7 in September.
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