Reply #18: EUR/USD: ECB To Leave Rates Steady, Trichet's Bias May Be More Hawkish

[Ghost Dog]

http://www.dailyfx.com/story/dailyfx_reports/cross_markets_data_reaction/EUR_USD__ECB_To_Leave_Rates_1194428022160.html
NOV 8 ECB Rate Decision (12:45 GMT; 07:45 EST) ECB’s Trichet Speaks (13:30 GMT; 08:30 EST)
Expected: 4.00%
Previous: 4.00%

How Will The Markets React?

There is little doubt that the European Central Bank will leave rates steady at 4.00 percent this week, but there is uncertainty surrounding what ECB President Jean-Claude Trichet will say during his monthly press conference following the rate announcement. During the October press conference, Trichet noted that “the outlook for price stability over the medium term is subject to upside risks” and that “the fundamentals of the euro area economy support a favorable medium-term outlook for economic activity.” However, Trichet also commented that caution must be “exercised when assessing any potential impact of the financial market developments on the real economy.” So has anything changed since October that will affect the ECB’s stance this time around? Trichet & Co. may have a hard time ignoring the surge in flash CPI estimates for October as the annualized rate rebounded to 2.6 percent from 2.1 percent in September. Trichet is known to be an ardent inflation hawk, but will it warrant “strong vigilance?” This phrase strikes a particularly strong note for central bank watchers as it has signaled an impending rate hike in the past. However, recent PMI figures for the manufacturing sector indicate that growth is slowing while both consumer and investor sentiment have turned more pessimistic, suggesting that the Euro-zone economy may be facing some road bumps. Furthermore, the financial markets have yet to fully recover, which may leave the ECB’s economic outlook uncertain. As a result, the ECB is likely to take a more firm stance on inflation risks but may not go as far as to cite the need for “strong vigilance,” which should leave the markets pricing in steady rates going into 2008.

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FX – EUR/USD

Broad based weakness in the greenback has allowed EUR/USD to tear higher, with records being accomplished daily. Most recently, comments from a Chinese official suggesting that the government would diversify their $1.4 trillion in FX reserves away from US dollar sent EUR/USD spiking to 1.4704. There is little doubt that the climb of the EUR/USD is much more of a “US story”, but what about the Euro-zone. Economic conditions in the region remain relatively resilient, though the manufacturing sector has started to falter and sentiment amongst consumers and investors has soured. However, it is inflation that will get the European Central Bank’s attention on Thursday, when their next monetary policy decision is scheduled to be announced. The ECB is expected to leave rates steady at 4.00 percent, but markedly hawkish commentary by ECB President Trichet could spark even more gains for EUR/USD to target the 1.4750 level. On the other hand, if Trichet focuses more on the potential for an economic slowdown and the shaky financial markets, his comments could help EUR/USD ease back slightly.

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