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ECB expected to raise rates in Q4 Back  
Each month, the Finance Markets Panel, which consists of leading Irish market participants and analysts, provide views on key financial markets, covering currencies, equities and the gilt markets.
This month’s contributors are: James Jordan, senior FX trader, Ulster Bank, Niall Dunne, financial markets economist, Ulster Bank, Eugene Kiernan, head of asset allocation, Irish Life and Enda Coll, head of institutional treasury, Anglo Irish Bank and Aziz McMahon, FX Strategist, ABN AMRO.

Euro 1 month interbank rate
Despite the hawkish comments, in relation to Eurozone inflation, from ECB president Wim Duisenburg at the recent news conference, Coll still feels that the ECB will not raise interest rates until the last quarter of 2002. He says that Duisenburg’s comments appear to have been aimed at the fiscal policy makers and ongoing wage negotiations in Germany. Coupled with the fact that doubts remain over the strength of the upturn on both sides of the Atlantic, Coll says that the ECB will hold fire on rates until Q4, and predicts a euro one-month interbank rate of 3.3 per cent in July. McMahon agrees with Coll and says that Duisneburg’s speech is more ECB brinkmanship than a real intention to hike rates, in his view, and he does not expect a move before October.

5-year euro swap rate
Jordan says that he is looking for the current pullback in yields to find a base ahead of 5.125 / 5.0 and another rally to unfold from there, targeting 5.45/5.61 further out.

Coll says that the more positive environment for the euro together with the occasional reference to sterling joining the EMU is likely to ensure that the euro continues to strengthen against sterling, with the possibility of EUR/GBP reaching .6300 in the next few months.

The euro is gaining solely because the market has changed its perception of the USD, not because it has any newfound confidence in the Eurozone says Dunne. Nevertheless, he believes that as long as equities continue to slide, the USD will continue to suffer. The current account deficit is also rapidly becoming a problem.So he says that his start of year call for closing EUR/USD rates of 0.94 is now looking on target. McMahon says that having broken key resistance at 0.9110, the risk is for a move to 0.9250 by the end of June. However, given the predominance of short-term players in the latest move, he sees some of the rally unwinding to around 0.9000 by September and to 0.8700 by December.

Kiernan says that while the Dow has slipped back in the past few weeks, he believes strongly that it will finish the year at higher levels. Jordan says that there is potentially a very important lower high in place at the 10673 level, with a sharp fall for the index to come.

10-year euro bond yield
Policy makers will be keen to take back some of the emergency rate cuts they have given over the past year and bond markets will see yields move reflecting this says Kiernan. However he remains very positive about the inflation outlook and says that any move up in bond yields will be modest and predicts that yields could go to 5.5 per cent over the next 3-6 months.

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