ECB Controls Euro's Fate

Talking Points

·          Aussie Home Loans drop -0.5%

·          JPY Muto - ZIRP can stay in place for a while

·          EZ PMI Services remain strong

·          US Calendar barren

ECB Controls Euros Fate<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

I know there is a slowdown and I dont care,  was the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />essential gist of the message by Fed Chairman Ben Bernanke yesterday as he stressed the dangers of accelerating inflation. The get tough posture on interest rates initially drove the EUR/USD below the 1.2900 figure, but the pair quickly recovered above that level in early European trade, as the market responded with its own  I-dont-care message by ignoring the dollar positive implications of an additional rate hike and focusing instead on the possibility of an impending slowdown in the US economy. Bottom line - according  to many market participants - higher interest rates amidst  a low growth environment will not be conducive to a strong dollar.

Tonights one sole piece of economic data the Euro-zone PMI services printed slightly higher than expectations at 58.7 versus 58.5. Both Italian and French components beat forecasts while the German PMI missed by .8 to the downside. Although overall positive, the news wasnt strong enough to provide further fuel for euro longs.

The near term direction for the pair will most likely be dictated by the action of the ECB. If the central bank raises rates by 50 basis point this Thursday and follows that announcement with a hawkish statement, 1.3000 may be breached to the upside.  If however, the market sees only a 25bp hike a retrace below 1.2800 could be the knee jerk reaction. In the meantime in the absence of additional news, the market is likely to oscillate around the 1.2900 figure as traders square up for the main event of the week.

Regardless of ECB actions, the contrast between the two  economic regions is becoming increasingly clear. US economic news is turning progressively worse while Euro-zone data continues to show improvement. The dollar one key support lies in the fact that sentiment towards the greenback is overwhelmingly negative.  With so many players targeting the 1.3000 level it would not be surprising to see that barrier stay out of reach for a while longer.

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