Dollar Down Euro Up As CB Chiefs Tell a Different Story

[B]Talking Points
• Japanese Yen: Eco Watchers at 5 year low but yen bid on risk aversion
• Euro: Remains near 1.4800 in post Trichet/Bernanke divergence
• British Pound: IP and MP weak pound falls more
• US Dollar: Trade Balance on tap[/B]

The euro remained well bid in the aftermath of yesterday’s sharply contrasting messages from the two most important monetary policy makers in world. While ECB’s Jean Claude Trichet remained unrepentantly hawkish, Fed Chairman struck a much more dovish tone indicating that the Fed stood “ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."
Mr, Trichet assumed a hawkish posture even as he himself admitted that risks in the EZ economy lie to the downside. However he stated that the only discussion amongst governing members was between a rate hike or a no-change stance implying that a cut was not even a consideration. While Mr. Trichet’s take-no-prisoners rhetoric is certainly impressive, we continue to argue that unless EZ economic data sees clear signs of improvement the ECB will not hike rates in the first quarter of 2008.
However, none of this may matter much with respect to EURUSD price action. If ECB remains stationary but the Fed continues to cut aggressively, the inversion in interest differential will weigh on the dollar and the pair could easily retest its all time highs if US monetary policy remains ultra dovish for the rest of this year.
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In Japan today the Eco Watcher’s survey hit a 5 year low while in UK Industrial and Manufacturing Production data both missed their mark, as signs of a global economic slowdown are becoming abundantly clear. Yesterday, the BOE refused to lower rates, but cable saw very little positive flow and continues to be offered overnight as traders are convinced that it is just a matter of time before MPC caves in to market demand.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]