Record Euro Value has Helped to Bring down Inflation

With fundamentals, technicals and sentiment lining up, it was not difficult to anticipate the latest turn in the EUR/USD. Not only has the strong Euro begun to put on a damper on growth, we are also seeing its effect on inflation.

Producer prices increased by 0.3 percent in the month of March, which was right in line with expectations, but the annualized pace of growth slowed from 2.9 percent to 2.7 percent. European officials continue to be relatively nonchalant about the rise in the currency. EU?s Alumnia said that “over the last four years, euro FX has not caused suffering to exports.” It is difficult to believe him when we have seen plenty of European exporters blame earning shortfalls on the value of exchange rates. Even though the currency?s value may not affect the European Central Bank?s plans to raise interest rates again in June, it could affect whether rates will be raised beyond 4.00 percent. We will be looking for more cautious comments from ECB President Trichet at next week?s press conference. In the meantime, we are expecting Eurozone retail sales and service sector PMI tomorrow. Yesterday, manufacturing PMI fell short of expectations but remained at high levels. We expect a similar situation for the service sector. Eurozone retail sales have downside risk after the sharp drop in German retail sales reported earlier this week. Meanwhile Swiss consumer prices printed considerably higher than expected, with the month-over-month rate reaching its highest in over 15 years on rising energy prices. Such strong levels of inflation growth will keep the Swiss National Bank on track to raise interest rates.