FX Thoughts - Watch For Trichet’s Comment On Euro 06-Mar-2008 0944 IST or 0414 GMT or 2314 EST
Over the past 2 months, the importance of the European central bank meetings have dwindled slightly, which is not surprising as it normally happens when a central bank is on hold in its interest rate cycle. The ECB has been on hold at 4.00% from June-2007 and there has been no chance in ECB stance as well.
However, in the last few days ever since Euro has moved above 1.5000 against the USD, there has been a marked increase in ECB rhetoric, to voice concern about a very strong Euro and the negative consequences thereof on the European economy. For instance, on Tuesday Belgian Finance Minister Didier Reynders said that "What I wish is that we will see the U.S. authorities' attitude strengthening" (in favor of a stronger dollar). Further EU'S Barroso said, "It is likely that the ECB will examine the strong Euro attentively".
In light of this, today’s press conference of Trichet would be focusing on two important things, which are in a way interlinked…European interest rates and Euro market level. The link is that ECB’s reluctance to cut rates (in fear of inflation), at a time when US is on a cutting cycle is fueling Euro gains against the USD. Realistically the recent EU fundamental data shows that the economy is moderating gradually (a soft landing) and hence there is no reasons to justify a rate cut at a time when Inflation is at its 8 year high.
Any rhetoric from Trichet on Euro level is likely to be very important. Trichet usually terms FX moves as "Brutal" if he finds any move stretched.
Apart from Trichet’s speech, the ECB staff would also give new projections for growth and inflation for the next 2 years, which is likely to get plenty of attention. The growth outlook is widely expected to be revised down and the inflation forecast is likely to be revised up. The previous ECB staff projection for 2008 GDP is 1.5% - 2.5% and the Inflation forecast is 2.0% - 3.0%.
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