The problem of a European interest rate hike - and the impact on your money transfer

The problem of a European interest rate hike - and the impact on your money transfer

Jean-Claude Trichet (head of the ECB) stated last week thatthe Euro-zone would have to take a strong, vigilant policy to control inflation risk. Whilst the ECB were unanimous on keeping rates on hold at a record low of 1% this hawkish statement (typical of what we have come to expect of Trichet) has really began to drive some Euro strength.

Are the market pricing in a rise that could potentially be disastrous for the Euro-zone? Whilst interest rate rises are very typically seen as bullish for the native currency, by making the prospect of a rate rise more likely (seemingly atleast) will have many member states of the zone holding the breath - Portugal in particular. Yields on Portuguese bonds are now above 7% and critics suggest that a bailout is weeks, and not months away. If a rate hike is made in the next month or two it may push the Portuguese over the edge and have to follow Greece and Ireland head down, in pursuit of a payout from the IMF (the International Monetary Fund). In this instance it seems that any strength the Euro may benefit from a rate hike will be countered by a Portugese bailout and perhaps we will even see Euro weakness, as Greece and Ireland are still not sitting comfortably.

Germany and France are the economies that still lead the Eurozone, they are the two biggest and two of the best performing as many of the southern states falter. Both Merkel (Chancellor of Germany) and Sarkozy (Prime Minister of France) drew up a "competitiveness pact" which was rejected by other states which meant there would be more of a central control on each member states individual fiscal policys. This is likely to be addressed on March 24th at the next summit but how far they will get in resolving this is another issue - particularly as states like Ireland will not be keen to re-dress their 12.5% corporation tax.

Unfortunately the Euro-zone is still plagued with so many difficulties and unlike the UK, inflation figures are not completely out of control, certainly if I were a member of the ECB I would not be voting for a hike any time soon. With all that is going on Trichet is coming acrossas a master of diversion. He has managed to make what may be an impending disaster to a situation that is drawing investment in the Currency markets -quite remarkable.

For anyone with funds in Euros it is looking like a very attractive time to sell with levels particularly attractive at present vs GBP and the USD.

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