Strong Euro Will Play a Role in ECB Policy

Having just raised interest rates last month, the European Central Bank is expected to make no alterations to monetary policy tomorrow. Although this means that the 7:45am EST announcement will be a non-event, the 8:30am EST press conference could be very market moving.

As usual, central bank President Trichet will be shedding more light on what they plan to do with interest rates in the months ahead. Like the UK, the Eurozone faces inflationary pressures that warrant higher interest rates, but the strong level of the Euro may give the central bank the flexibility to wait until after the summer to raise rates. They may not want to risk sending the EUR/USD to 1.40 by raising rates prematurely when the strong currency will automatically help to reduce inflationary pressure. This morning?s Eurozone data was mixed. Eurozone service sector PMI was stronger than expected in the month of June which combined with the strong manufacturing data, is very encouraging. Retail sales however fell short of expectations, but that was expected given weakness in German consumption.