ECB: Could they Raise Interest Rates? (page 2 of 2)

Why? The answer is simple, inflation. Consumer prices in the month October jumped to a 2 year high of 2.6 percent, well above the central bank's 2 percent target. Maintaining price stability has long been one of the ECB top priorities. Today's CPI data illustrates the degree of price pressure that the Eurozone economy currently faces. The ECB needs a strong Euro to bring down inflation which is why they have not shown any major concern about the level of the currency. In fact, they could even be seriously considering raising interest rates. Yesterday, the central bank of Sweden raised rates by 25bp. Like the ECB, they were worried about growth and the impact of the global market turmoil, but at the same time inflationary pressures were such a concern that they opted to raise rates to the highest level in nearly 5 years. The ECB faces the same predicament and given the decision by Sweden, we would not be surprised to see a hike from the ECB as well. At bare minimum however, monetary policy will remain hawkish for the remainder of the year.

British Pound Hits 26 Year High

The British pound rose to a 26 year high on the back of broad dollar weakness and speculation that the housing market may not be in as much as trouble as everyone may have initially thought. According to Nationwide, tight supply drove house prices up 1.1 percent in October, the biggest rise in four months. Consumer confidence however has fallen to the lowest level since March, which signals potential troubles ahead for retail sales, but for British pound traders this has mattered little since demand for high yielding currencies and dollar strength or weakness seems to be the primary driver of the currency's movements at the moment. Manufacturing PMI is due for release tomorrow. The recent strength of the British pound is expected to dampen manufacturing activity.

Carry Trades Take Off After Fed Decision

The Japanese Yen crosses were the best performing currency pairs in the market today. Stocks took a wild ride today, translating into equally volatile price action in the carry trades. The Bank of Japan left interest rates unchanged last night, which was right in line with expectations. They also lowered their growth forecasts from 2.1 percent down to 1.8 percent for 2007. Labor cash earnings were also weaker than expected, making the fundamental bias for the Japanese Yen very clear.