Despite weakening economic data ECB President Trichet has not changed his monetary policy stance or expressed any concern about the level of the Euro.
Instead in his speech this weekend, he simply credited the central bank for their decisive and active response to the recent market turmoil. Now that earning season is beginning however, the central bank head may not have any choice but to recognize the damage that the Euro is having on corporate profitability. Last week, European Aeronautic Defense and Space Company said they stand to lose EUR 1 billion for each 10 cent drop in the US dollar against the Euro and we are sure that they are not the only ones feeling the pain. Over the past few years, European companies have become more adept at hedging currency risk, but most of these companies probably did not expect the Euro to break 1.40 and heads towards 1.50. Expect many companies will be blaming their losses on exchange rate fluctuations. In terms of economic data, even though Eurozone manufacturing PMI remained unchanged, activity slowed in both France and Germany. Switzerland has been experiencing a more material slowdown even though the central bank remains optimistic. Despite a weakening currency, the country has been hit hard by the global financial turmoil. Swiss consumer prices are due for release tomorrow. The falling value of the Franc should boost inflationary pressures.
Written by Kathy Lien, Chief Currency Strategist for DailyFX.com