Euro Drops Below 1.5200 As Trichet Fallout Continues. Pound At Lowest Level Since Mar

The Euro continued to slide against the greenback during overnight trading dropping below the 1.5200 handle hitting a five month low on the back of dovish comments from President Trichet, following yesterday’s ECB rate decision. The central bank leader would state that”the latest economic data point to a weakening of real GDP growth in mid-2008”, which reduced expectations of future rate hikes by the MPC. Traders continue to take down the pair as they start to increase their bets that a rate cut may be in the offering before the end of the year. Although, we feel that a reduction may be due in early 2009, Trichet’s concerns over second round inflationary effects will keep the ECB on hold for 2008. The growth concerns were highlighted today with Italy reporting GDP falling 0.3% in the first quarter as it approaches recessionary levels for the year.

The pound sterling fell below 1.9300 for the first time since March 16, 2007 as the growth outlook for the U.K. and Europe-its main trading partner- continues to decline. The BoE also left their benchmark rate unchanged and although the central bank doesn’t release a statement following non-action, expectations are that a rate cut could be forthcoming by the end of the year. If the staunchly hawkish Trichet is moving on his bias considering the downside risks to growth then Governor King facing the same declining growth and a historic housing slump most likely will abandon his recent hawkishness. Next week minutes could show move votes for a rate reduction other than perennial dove David Blanchflower.

A U.S. calendar filled with second tier indicators in the form of unit labor costs and wholesale inventories will provide little event risk and threat to the dollar’s current momentum. However, the upcoming earnings release from Fannie Mae could reignite subprime credit concerns, if the beleaguered GSE follow its brother Freddie Mac in reporting significant losses, and lead to a bout of profit taking and dollar weakness.

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