Despite an initial surge higher, the Euro tanked following the release of the European Central Bank’s rate decision.
Indeed, the ECB left rates steady at 4.25 percent, but it was ECB President Jean-Claude Trichet who, as usual, proved to be more market-moving. Mr. Trichet said that recent economic data pointed toward "a weakening of real GDP growth in mid-2008" following strong growth during Q1, and with Euro-zone Q2 GDP scheduled to be released on August 14, there are concerns that the economy actually contracted. Meanwhile, the ECB remains particularly hawkish on inflation, saying that CPI would remain above 2 percent for "some time" and that recent data supported the latest rate hike in July. Since price stability is the ECB's primary mandate, the central bank will have limited ability to completely brush off the inflation data on hand in order to make monetary policy more accommodative due to an economic slowdown. Nevertheless, the markets have taken the bearish notes on growth to heart, as overnight index swaps are now pricing in 25bps worth of rate cuts within the next year, which is clearly to the detriment of the Euro. However, market expectations change and so can this speculation about interest rate reductions. Two key events that I think will be the most important for this include Euro-zoneQ2 GDP next week and the release of the ECB’s growth and inflation forecasts in September. From a technical standpoint, EUR/USD is currently testing the 3/11, 5/8, and 6/12 lows near 1.5300. Given the extent of the recent declines (around 700 pips from the 7/15 record and over 200 pips since the start of the week), my bias is that EUR/USD should consolidate above 1.5300 in coming days, especially since there is no major European data scheduled for release on Friday. However, a break below this point would be indicative of sharper declines toward the 200 SMA at 1.5220 and the 50% fib of 1.4309 – 1.6036 at 1.5175.
