Despite Hot CPI, Euro Sells Off On Intervention Speculation

[B]Talking Points

• Japanese Yen: BoJ Intervention Fears Providing Support
• New Zealand Dollar: Manufacturing Jumps to 15 Year High
• Euro: CPI Hotter than Expected
• Pound: Ran Into Bollinger Band Resistance at 2.0350
• US Dollar: CPI on Tap[/B]

Despite Hot CPI, Euro Sells Off On Intervention Speculation

Eurozone CPI printed higher than expected as food and energy costs continue to rise. The year-over-year headline reading increased to 3.3% from 3.2%, and the core index rose 1.8%. Despite the implications of rising inflation, the Euro continued to sell off, as it had after setting a new all time high of 1.562 during Asian trading.

The region’s inflation story is worsening as oil continues to set records and food costs accelerated 5.8 percent. Additionally, labor costs increased as Union negotiations are starting to finalize and lock in wage increases. The ECB staunch hawkish stance is continuing to be justified as they try and prevent costs from deviating to far from their 2% threshold. This supportive data to their case, has led to expectations drastically decreasing that the ECB will cut rates by year’s end

Growing fears of a coordinated central bank intervention has traders ignoring the Euro bullish implications of the data and looking to lock in profits. As the ECB and U.S Treasury secretary Paulson have recently raised concerns over the weakening dollar, the possibility of an intervention is increasing. Although, many suspect that it is merely jawboning on their part cautious traders are starting to price in the possibility.

The Fed’s recent infusion of liquidity has many speculating that the next anticipated rate cut will not be as deep as expected. Today’s CPI reading will be a major influence in the MPC’s decision. Expectations are that the core index will ease to 2.3%, which despite being above the 2% threshold, will alleviate some concerns and may embolden the Fed to deliver the 75 point cut the markets expect. However, a rise in inflation will assuredly give Bernanke & Co reason to pause and may encourage dollar bulls, as speculation will increase that a smaller reduction is in the works.

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