Euro Higher Ahead of ECB, but Will ECB Surprise and Wait Until June?

• Japanese Yen: CGPI hotter than expected
• Euro: Italian IP slips second month in a row GDP in line
• British Pound: Trade Balance deficit widens
• Euro: ECB on Tap

Euro Higher Ahead of ECB, but Will ECB Surprise and Wait Until June?
The euro rallied against all of the majors in early Asian session as traders bet heavily that the ECB will back up its hawkish rhetoric by signaling a rate increase in May. Dealers will be glued to the broadcast of the ECB press conference at 12:30 GMT today looking for the mention of the word “vigilance” which has become ECB chief Jean Claude Trichet’s favorite catchphrase to prepare the market for an upcoming change in monetary policy.
The question remains open however, whether Mr. Trichet will choose to be so direct this time or whether he may prefer to have the flexibility to postpone the decision until the June meeting. With the euro trading at record highs against the yen and the Swiss franc, bolstered by the insatiable carry trade demand, the European monetary authorities have good reason to try to slow down the appreciation of the currency. Although German and French Industrial demand appears healthy, seemingly unaffected by the rise in the exchange rates, Italian Industrial Production fell for the second month in a row and may be a precursor of the more difficult economic environment for the Euro-zone producers should the euro rally further. Furthermore, it is becoming increasingly clear that Japanese monetary authorities will maintain a neutral stance until well past the June Parliamentary elections, therefore the only way for the ECB to slowdown the EURJPY juggernaut is to delay the rate hike until June which should push some of the short term speculative capital out of the pair. The rise in the euro is certain to exacerbate the region’s Trade Balance problems not only with Japan but perhaps more importantly with China which now exports as many goods to the Euro-zone as it does to the United States. Unlike UK, which a capital dependent economy driven by financial services, the Euro-zone still looks to its production sector as a key source of growth. With the French Presidential election looming in the background which has seen the high value of the euro become a major campaign issue, it will be interesting to see if Mr. Trichet and company will decide to be more circumspect today in their communication with the market.
In other news the UK Trade Balance once again printed a bigger deficit than forecast, however of far great import was the better than expected results of the RICS house survey. RICS registered a rise to 26% from 25% the month prior and beat consensus estimates of 22%. The UK housing data indicates that the market remains red hot as it appreciates at a near double digit annual pace. Given that dynamic, the prospect of a another rate hike by the BOE in May appears increasingly likely.