Trichet was very hawkish in his press conference and sounded extremely worried about commodity prices and second round inflation effects.
The financial markets have picked up on three aspects of his speech:
1. that the ECB are using strong vigilance to ensure inflation expectations remain well-anchored and second round inflation effects are avoided.
2. That he omitted the phrase interest rates are appropriate, which clearly lays the ground work for a near-term hike.
3. But he made it clear that a rate hike in the near-term did not signal the start of a prolonged tightening cycle.
This sent EURUSD flying up to 1.3950, and 3-month swap rates have surged to their highest level since February 2009. This points to EURUSD above 1.4000 in the near-term, as you can see in the chart below:
It now looks like the ECB could hike before the Bank of England, which is weighing on sterling versus the single currency. The spread between German and UK 2-year bond yields, which is extremely sensitive to interest rate expectations, has also surged in Germany's favour to levels last seen in November 2010, when EURGBP was trading at 0.88. So the onus is for higher EURGBBP.
Overall, Trichet has lent the euro some rocket fuel. But I'm a little surprised that EURUSD didn't hit 1.4000 during the speech. I think this may be because he emphasised that a hike in the near-term wasn't the start of a prolonged tightening cycle - so the ECB isn't just thinking about Germany, it is also thinking about the weak peripheral economies when it sets policy.
Don't forget that you can now follow Forex.com's research team on Twitter: http://twitter.com/forexresearch
Kathleen Brooks| Research Director UK EMEA | FOREX.com
d: +44.(0).20.7398 5024 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919422957 | e: firstname.lastname@example.org| w: www.forex.com/uk
12 Camomile Street | 9th Floor | London EC3A 7PT
Now you can follow us on Twitter: http://twitter.com/forexresearch
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Authorised & Regulated by the Financial Services Authority
Forex and other leveraged trading can involve significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary. This email contains confidential information belonging to FOREX.com and is intended solely for the addressees. The unauthorised disclosure, use, dissemination or copying (either whole or partial) of this email, or any information it contains, is prohibited. FOREX.com assumes no responsibility for errors, inaccuracies, or omissions in these materials. FOREX.com does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. We respect your privacy. Email addresses are not released to third parties.
FOREX.com UK a trading name of GAIN Capital - FOREX.com UK Limited and is authorised and regulated by the FInancial Services Authority. FSA No. 190864.