NEWS / Fiscal Policy, Budget

Euro vulnerable to correction

Euro vulnerable to correction

The Euro hit resistance above 1.2820 during Wednesday and drifted slightly weaker. The Euro weakened towards 1.2750 in early Europe on Thursday as long positions were curbed.

Attention will tend to be focussed on the ECB monthly interest rate decision during Thursday. The most likely outcome is that there will be a 0.25% increase in rates to 3.0%. The ECB press conference will be important for the markets and, assuming a 0.25% rate increase, the Euro will be vulnerable to profit taking if there is a softer than expected stance on future policy from ECB Chairman Trichet. The Euro will also weaken sharply if rates are not increased.

European officials are also liable to express some concerns over the Euro??™s level if there are further significant gains and the firm Euro will increase the risk of a cautious ECB policy statement on Thursday. The Euro-zone PMI index for the services sector was weaker than expected with a decline to 57.9 in July from 60.7 in June which will raise some concerns over the growth outlook.