Euro Rallies as ECB Sticks to Plan for Raising Interest Rates

Despite the turmoil in the financial markets, the European Central Bank still wants to push forward with raising interest rates next month. After injecting EUR$40 billion Euros into the financial system, they put out a press release saying that they still hold the same monetary policy stance as the one expressed by ECB President Trichet on August 2, 2007.

On that day, he had told the markets that they needed to exercise strong vigilance, which was their way of saying “expect an interest rate hike next month.” Last night?s reminder sent a strong message to the markets about the ECB?s plans to continue raising interest rates. As a result, rate hike expectations have soared from 5 percent up to 50 percent. This renewed possibility of an interest rate hike has helped the Euro rally against both the US dollar and Japanese Yen. As long as there is no new blowup driving another wave of flight to safety, the expectations of three interest rate cuts from the Federal Reserve before the end of the year against the possibility of a rate hike from the ECB should keep the EUR/USD above 1.3450. Meanwhile Swiss economic data was mixed. Second quarter employment was stronger but the ZEW survey of analyst sentiment deteriorated. The Swiss franc has slipped, but that is partly due to the rebound in carry.