The European Central Bank left interest rates unchanged at 4 percent. Although the Euro initially sold off on the back of this announcement, it recovered quickly following ECB President Trichet?s press conference.
Despite repeated attempts by reporters to get him to address the level of the Euro or its impact on the economy, Trichet said point blank that he is not going to comment on the currency. Instead, the only things that he is willing to say are that it is important to exercise verbal discipline on exchange rates, exchange rate volatility is very counterproductive and he would appreciate a US position on the strong dollar. What he was very explicit about was the risks to inflation. The ECB believes that inflation will remain above their 2 percent target well into next year. Many could argue that Trichet has moved the ECB closer to neutral by reminding traders that he did not say monetary policy was accommodative and on balance, the risk to growth is to the downside. However the fact that he refused to comment on the exchange rate meant that he is not worried the current level. For currency traders, this was a green light for a move back towards the all time high of 1.4282.
[B]Written by Kathy Lien, Chief Currency Strategist for DailyFX.com[/B]