Contrary to popular belief, the European Central Bank is not worried about the current level of the Euro. ECB President Trichet said in a speech today that inflation risks are to the upside and even after the recent rate hikes, monetary policy is still accommodative. He also indicated that there is “no room for complacency,” which suggests that they could raise interest rates in September, right after they come back from their summer holidays.
Trichet knows that the high level of the Euro reduces inflationary pressures, which means that wage growth must be so significant that the central bank is willing to risk pushing the EUR/USD up to 1.40, a level that will surely drum up strong political opposition. In an act of unity, ECB members Garganas, Stark and Hurley also made similar comments. In contrast to the problems here in the US, the ECB?s hawkish stance is driving the overall strength that we have seen in the EUR/USD. The ECB will be publishing its July monthly bulletin tomorrow along with their quarterly GDP forecasts. Strong numbers will add validity to the ECB?s hawkish inflation stance which will be perceived as Euro bullish.