Implications for the Euro

If a tightening is seen by the ECB this year, analysts are forecasting minimal increases of either .25 or at the most .50 basis points by year-end. However, others have shifted to a no-tightening bias.

“My view is that the ECB will not raise rates at all this year,” Weinberg says. Market players, however, have yet to “reprice” expectations into the exchange rate.

“Market pricing is still for a second half year rate rise, but 4cast continues to take the view that any tightening this year is unlikely,” Webster says.

“However, we do now expect rates to rise by some 50 basis points around the end of first quarter 2006.”

What will this mean for the Euro? “The notion that the ECB will not hike rates this year, while the Federal Reserve hikes rates aggressively, adds up to a wide change in interest rate spreads between Euro land and the U.S.,” Weinberg says. “That’s negative for the Euro and positive for the dollar.”