How many times will Trichet use the words 'price stability'? (page 1 of 2)

DailyFX Fundamentals 04-09-08

By Kathy Lien, Chief Strategist of DailyFX.com

The Pressure on the US Dollar

The currency market has been exceptionally quiet over the past few days with the EUR/USD and USD/JPY confined within a tight trading range. This range however was broken today as the EUR/USD came within 50 pips of its record high.

Although there was no meaningful US economic data released, the move in the dollar represents the pressure that the market expects to fall upon the greenback over the next 24 hours.

The European Central Bank (ECB) and the Bank of England (BoE) have monetary policy announcements. The former is expected to keep rates unchanged while the latter is expected to lower them. However for the US dollar, the relative dovishness of the Federal Reserve may be the most important.

The minutes from the last FOMC meeting reveals a divided Fed that is concerned about both growth and inflation. Although from here on forward, the Fed could slow down their degree of easing, the ECB's reluctance to cut interest rates and the BoE's own internal struggles (read the EUR and GBP sections for more details) could keep pressure on the US dollar.

Furthermore, the US trade balance could also turn out to be dollar negative. Even though the greenback has weakened significantly, which should help to narrow the trade deficit, manufacturing ISM also slipped that month which suggests that the contribution may have been limited. There are still a lot of inherent problems in the US economy.

We have previously warned of a further deterioration in the US labor market, but more immediately, US retail sales are expected to be released on Monday. With Linens 'n Things joining Domain, Fortunoff, and Sharper Image in filing for bankruptcy protection, there is a decent chance that consumer spending could contract for another month.

Crude oil and gasoline prices have also hit a record high which will take a toll on the pocketbooks of nearly all Americans. It may not be long before gas prices hit $4 a gallon across the nation.

How many times will Trichet use the words 'price stability'?

The Euro has come within 50 pips of its all time record high against the US dollar ahead of the ECB interest rate decision. The latest price action suggest that the the notoriously stubborn ECB President Claude Trichet will continue to remain hawkish and express no concern about the level of the currency.

Although retail sales have dipped, industrial production and the trade balance is on the rise. The improvement in the trade picture is particularly important because it confirms that the strength of the Euro continues to have only a limited impact on the Eurozone economy. At the last monetary meeting, Trichet used the words "price stability" 8 times in his Introductory Statement.

Although the ECB lowered their growth forecasts at the time, they also upgraded their inflation forecasts, sending a strong message to the markets that interest rates will remain unchanged for some tine. Looking ahead to this interest rate meeting, as long as the tone of the press conference remains the same and price stability is used no less than 8 times, there is a decent chance that the EUR/USD could hit a new all time high.

However should Trichet acknowledge the slowdown in growth, expect the EUR/USD to top out below 1.60 once again.

Bank of England: 25 or 50?

Even though the market is dedicating the bulk of its attention to the ECB monetary policy meeting, the Bank of England announcement is actually the one that could lead to more volatility in the currency market.