EUR/USD Tips Higher in European Trade Following the ECB Monthly Report

ECB monthly report repeats that interest rates are appropriate. The editorial of the July report is as usualy a close repeat of president Trichet’s introductory statement from last week. It said that the economy will remain weak, but expects a gradual recovery and positive growth from mid 2010 with balanced risks. The drop in headline inflation into negative territory in June ws expected and reflects mainly temporary effects, even though inflation will remain dampened over the policy relevant horizon. Again, nothing new in the comments, which confirm that the ECB is firmly on hold with no change in rates expected in H2. No sign also that the ECB will extend its asset purchase program, but the report stresses that “once the macroeconomic environment improves, the Governing Council will ensure that the measures taken are quickly unwound and that the liquidity provided is absorbed.”

EUR-USD extended it overnight recovery and pushed back in to 1.3950 in European trade. An uptick in risk appetite was a supportive factor, along with general interest for EUR-JPY from Japanese lifers and sovereign names. EUR-JPY traded up to 130.30 versus Asian session lows of 128.10 and enabled EUR-USD to rally out of 1.3900. The euro story is short covering, with little changing fundamentally since yesterday’s European close. European equity markets rallied moderately, which reinforced the bid tone and should fuel more bargain hunting. Option expiries are getting some airplay, with outstanding strikes at 1.3840, 1.3900 and 1.3925, which may encourage sellers towards the 1.3980-00 area amid delta related hedging. Eurozone data included German final CPI, which was confirmed at 0.1% y/y and HICP came in at 0.0% y/y as expected, while German May sa trade surplus improved to EUR 10.3 bln.