That will be the question that dominates the markets today as we have a data void until 1330 GMT when the payrolls figure is announced (196k expected). That is keeping EURUSD trading in a tight 20-point range this morning. EURUSD surged 120 points after the surprise explicitness of Trichet's speech (see more below) but it will all depend on payrolls today to see if it can close the week above the key psychological barrier of 1.4000.
Prior to the payrolls figure, a number of ECB speakers before lunchtime could set the stage for a further leg higher in the euro. So far Germany's Weber and Italy's Mario Draghi have spoken about regulations and not thrown any light on the ECB's sharp change of tack regarding rates. What really shocked the markets wasn't just the announcement that rates are more than likely to rise next month, but Trichet's explicitness. He used the code strong vigilance to signal the hike but he also basically told the markets that there will be a 25 basis point rise in April and that it won't signal the start of a prolonged rate hiking cycle. The ECB is raising rates to snuff out inflation pressure, but it is being delicate in its policy response as there is still a sovereign debt crisis going on that is afflicting some peripheral nations.
The reaction was huge, especially in the credit markets. Euriobor - the European inter-bank lending rate- rose to a 20-month high, even though Trichet said the ECB would maintain their full suite of liquidity measures for the banks. The three-month Eonia rate also rose to 25-month high, which points to further euro gains ahead. Trichet's bold move certainly leaves the dollar on a less firm footing, but a large print in payrolls today could disrupt the euro's ascent and delay the 1.4000 mark for a few days especially if the dollar becomes a growth play. However, yield is on the euro's side and this will drive the single currency for the medium term.
The ECB is also 99.9 per cent likely to hike before the Bank of England and EURGBP has also surged, and 0.8600 is now in view. The 2-year rate differential between German and UK government bond yields suggests further upside to the 0.8800 level.
Looking further ahead the ECB has proven it can make brave choices, but it still has a hard task on its hands. The Bank has to rely on the EU authorities to sort out the sovereign debt crisis, while at the same time fight inflation. Since headline inflation is above 2 per cent, a 25 bp hike next month still means that real interest rates in the Eurozone will be negative. If the ECB is really tough on inflation it will need to hike rates more than once in the coming months. The market may call the ECB's bluff, and it is currently pricing in a more than 50 per cent chance of rates being 2 per cent in 12 months time.
The interest rate differential between Europe and the US has widened on the back of yesterday's press conference, which is weighing on the dollar. Since a weak dollar pushes up the price of commodities, Trichet's press conference has also sparked higher oil prices. WTI is above $102 and Brent is around $115.50 per barrel. A strong labour market report could fuel further gains for crude later this afternoon on the back of a strong US recovery.
Elsewhere, stocks are higher and gold is fairly mixed. Although the market's focus has shifted back to the G3, events in the Middle East still have the power to spook the markets and should not be forgotten about.
13.30GMT (0830 ET) US Non Farm payrolls Last 36K Exp 196K
13.30GMT (0830 ET) US Private Non Farm Payrolls Last 50K Exp 200K
13.30GMT (0830 ET) US Unemployment rate Last 9.0 Exp 9.1
13.30GMT (0830 ET) US Average Hourly Earnings Last 0.4 M/M 1.9 Y/Y Exp 0.2 M/M 2.0 Y/Y
13.30GMT (0830 ET) US Average weekly hours Last 34.2 Exp 34.3
15.00GMT (1000 ET) US Factory orders Last 1.0 Exp 2.0
15.00GMT (1000 ET) CD Canadian IVEY PMI Last 41.4 Exp 51.2
15.25GMT (1025 GMT) EU Trichet Speaking
21.00GMT (1600 ET) US Yellen (FOMC Voter) Speaks on the International monetary and financial system,
BIS Meeting in Basel
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