Talking Points
· CHF Inflation data tame suggesting no hurry for SNB<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· EZ PMI Services slips after World Cup
· EZ Retail <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Sales in line
· BOE raises to 4.75%
· ECB rate hike on tap
· US ISM Services and Factory Orders due
The EUR/USD drooped about 50 points in early <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Asia trade and consolidated its losses for most of the European session as traders adjusted their positions ahead of the ECB rate announcement at 11:45 GMT later today. The market expects the European Central Bank to hike rates by 25bp to 3.00% but the concern on most dealing desks is that the ECB President Jean Paul Trichet will remain non-committal regarding the schedule of future rate increases. As we have noted before the ECB will likely raise rate only once in the month of August, but the market is more focused on September having already priced in an additional 50bp points of tightening by the end of 2007. Should Mr. Trichet suggest that rates may remain the same in September, the EUR/USD is likely to face more selling pressure/ <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
The overnight economic data provided little support to the euro with PMI Services declining to 57.9 from 60.7 the month prior, sharply lower that the 60.1 forecast. The pullback was partially due to the end of the World Cup tournament which brought a burst of economic activity to the host nation Germany. EZ Retail Sales also grew less than expected rising 0.5% versus 0.8% consensus. However, the figures from the month prior were revised upward from -0.6% to -.3% and the year over year numbers met expectations rising 1.5%. Overall, the EZ economy continues to display steady, albeit modest growth that remains consistent with ECBs gradualist approach to monetary policy. Traders looking for a more aggressive posture from the ECB in the upcoming months are likely to be disappointed. However the euro may strengthen nevertheless if the Fed chooses to end its tightening in August after 17 consecutive interest rate hikes. In that case, ECBs slow but steady continuation of rate increases in comparison to a halt by the Fed will appear bullish to the market.
Europe is not the only major currency center to implement monetary policy today. The Bank of England unexpectedly hiked rates to 4.75% form 4.50%. Although some currency traders predicted the move based upon the recent revival of the UK housing prices which remain the critical factor to drive BOE monetary policy, the move took most market players by surprise and may now add pressure on the ECB to maintain its tightening bias.
