With the much awaited European Central Bank interest rate decision just around the corner, the market placed greater than normal weight on the PPI release this morning.
Producer prices increased 0.4 percent in April, bringing the annualized pace of growth down to 2.4 from 2.8 percent. Eurozone Retail sales and service sector PMI could fuel more gains the EUR/USD ahead of the interest rate decision. Comments from ECB officials continue to be hawkish. President Trichet said this morning that growth prospects are still very encouraging. ECB member Wellink added that low inflation is “no reason for complacency.” This essentially guarantees a rate hike on Wednesday and may raise the number of traders expecting hawkish comments in the accompanying press conference. However it is important to understand that after the ECB raises rates, unless they plan on following up with another hike the very next month, the central bank usually neutralizes its statement to some degree. Typically this involves dropping the words strongly vigilant, which would be perceived as a more dovish move. Even though economic growth has been strong, is not strong enough to warrant back to back rate hikes. The last time they delivered two consecutive hikes was back in September and October 2000. The only reason why they were so aggressive was because the EUR/USD hit a record low and the central bank was desperately trying to drum up demand for the currency pair.