Euro Hits New Highs, ECB Should Remain Hawkish (page 2 of 2)

Euro Hits New Highs, ECB Should Remain Hawkish

The Euro hit a new all time high of 1.5275 against the US dollar following stronger Eurozone economic data and weaker US numbers. The European Central Bank is widely expected to keep interest rates unchanged at 4.00 percent and as usual it will not be the rate decision that moves markets, but Trichet's comments at the accompanying press conference. Recent economic data gives the central bank President all the justification that he needs to remain hawkish, especially as oil, gold and corn prices climb to record highs. Unlike the Federal Reserve, where Bernanke is placing greater emphasis on growth than inflation, the ECB devotes nearly 100 percent of their efforts towards fighting inflation. They have the unique luxury of doing so with economic data reflecting a relatively stable economy. Tomorrow's Eurozone PPI and GDP numbers should confirm this trend. For that reason, we continue to believe that the EURUSD will press even higher and any retracement should be seen as an opportunity to add to long positions. Meanwhile, Switzerland will also be releasing consumer prices and GDP tomorrow. The franc is mixed and even though these are relatively important numbers, we doubt that it will have a lasting impact on the currency.

British Pound Underperforms Despite Stronger Economic Data

The British pound underperformed both the Euro and US dollar despite stronger economic data which indicates that the market is just as bearish pounds as they are dollars. The rebound in manufacturing sector PMI last month is encouraging but not enough to offset the market's caution ahead of Thursday's Bank of England rate decision. Although the BoE is expected to leave interest rates unchanged, it should only be a matter of time before rates are reduced once again.

USDJPY Falls to 3 Year Lows

The US dollar fell to a 3 year low against the Japanese Yen on the back of stronger Japanese economic data, disappointing US data and continual weakness in US equities. Labor cash earnings jumped 1.0 percent in the month of January which suggests that the Japanese economy may be recovering. Meanwhile the NASDAQ dropped to the lowest level since October 2006 weighing on all carry trades.