[B]Talking Points
• Japanese Yen: strengthens a bit in anti dollar flows
• Euro: CPI hot euro flies through 1.5900
• Pound: Employment in line
• US Dollar: CPI on tap [/B]
Hotter than expected CPI data out of the Eurozone propelled the euro through the 1.5900 level in early European trade as focus returned to inflation which will likely continue to dictate a restrictive monetary policy from the ECB for the time being. The data printed at 3.6% versus 3.5% as food energy and clothing costs all rose more than expected. With ECB mandated to control price pressures rather than manage growth, today’s number essentially assured the market that Mr. Trichet and company will remain hawkish keeping rates at 4% for the foreseeable future.
The policy of the ECB stands in stark contrast to Fed’s actions. US monetary officials saddled with a massive credit crunch and a serious recession in the housing sector that looks to spread to the economy as a whole, have basically ignored the inflationary numbers, persistently lowering US rates since last year. As result the EURUSD rallied continuously on interest rate differentials and now stands within striking distance of the 1.6000 level.
The question going forward is just how much momentum will the pair have if it breaks through 1.60? Currency markets always tend to take prices to extremes, and if monetary officials do not intervene then the possibility of a run on the dollar becomes quite real. Therefore, the 1.60 level may prove to be the key battle ground between the bulls and the bears that may determine the near term direction for the pair.
For the time being the EURUSD is trading on pure momentum and only a combination of hotter than expected US CPI data and better than forecast Housing and Industrial Production reports could curtail its ascent. If US economic data shows a modicum of strength, the market may rethink its dovish stance on Fed policy. If, on the other hand, today’s numbers prove to be weak, the EURUSD could take out 1.60 before the day is done.
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