Euro Ends Rally as ECB Expected to End Interest Rates Hikes

The euro slumped today, ending its two-day rally against the dollar, on the speculation that the European Central Bank will stop to increase interest rates as economic outlook became uncertain.

ECB President
Jean-Claude Trichet said yesterday during the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament:

Incoming information since our last regular hearing in June continue to point towards ongoing growth in the euro area, although – as expected – at a slower pace. After a strong increase of 0.8% quarter-on-quarter in the first quarter of 2011, partly due to special factors, real GDP growth decelerated to 0.2% quarter-on-quarter in the second quarter.

He also said:

Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September

Market analysts compared this statement to Trichet’s previous statement that the inflation outlook is “on the upside” and made a conclusion that the ECB may halt increases of borrowing costs.

EUR/USD sank from 1.4510 to 1.4417 and EUR/JPY fell from 111.49 to 110.64 as of 12:18 GMT today.

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