The currency pair that had the most significant reaction to the FOMC announcement was the EUR/USD.
With the Fed meeting behind us, the ECB is the only central bank expected to make any changes in interest rates over the next 2 months. ECB President Trichet said this morning that there is an acute risk of wage price spiral and reminded the market that they could raise interest rate 25bp at the next meeting. The ECB’s intentions should be quite clear and with a little more than one week to the ECB meeting, the market may continue to bid up Euros against US dollars simply because one central bank will be raising interest rates while another remains stationary. This would widen the gap between Eurozone and US interest rates from 200 to 225bp in the Euro’s favor. In the meantime, good news is still being reported from the Eurozone. Industrial new orders jumped 2.5 percent in the month of April, well above the market’s -0.5 percent forecast. German import prices are due for release tomorrow and given the rise in oil prices last month, we expect import prices to continue to edge higher. The ECB also has no problems with further Euro strength. According to ECB member Wellink, the equilibrium rate for the Euro is around 1.60. The central bank wants the Euro to rise because they know it will help to ease inflationary pressures.