Apparently ECB President Jean-Claude Trichet was not swayed by Wednesday's reports indicating a slowdown in Euro Zone economic activity, instead choosing to remain hawkish by making comments that indicate that the ECB is not likely to lower interest rates soon.
Trichet believes that inflation will remain at an elevated level for a rather protracted period.
By leaving interest rates unchanged without even a hint of a possible rate reduction in the future, the ECB erased some of the Dollar’s gains from Wednesday.
The move by the ECB also draws a line in the sand between the Fed and the ECB as comments from a Fed official on late Tuesday signaled the possibility of a Fed rate increase late in the year if U.S. inflation appears to be out of control.
Trichet made no direct comment on the report earlier in the week showing that retail sales declined 1.6 percent in March from a year earlier. Instead, he made general statements regarding the economy including:
The economic fundamentals of the Euro area are sound, with moderate but ongoing GDP growth.
Trichet also made a comment which seemed to be directed toward the global subprime mortgage problem by stating, … however, the level of uncertainty resulting from the turmoil remains unusually high.
Despite Trichet's hawkish comments, two scenarios appear to be developing, both of which indicate the Euro may see downside pressure.
The ECB may ease to stimulate growth. This action may tighten the interest rate differential, which could trigger selling pressure. Secondly, inflation from higher energy and food prices could cripple the Euro Zone economy. Higher inflation could trigger an economic slow down which would also weaken the Euro.
At this time the assumption that the Fed would cease its policy of interest rate cutting is the driving force in the market. It looks as if traders are content with pushing the Euro sideways to lower until the next Fed meeting on June 25. This gives the Fed plenty of time to assess new economic data in order to judge the soundness of the U.S. economy.
Expectations over the short-term are for a weaker Euro, although the market may be subject to periodic short-covering rallies.
Weaker than Expected Housing Figures Pressure Canadian Dollar.
Traders decided to shift their focus away from the energy markets and to instead refocus their attention on the stumbling Canadian economy.
The USDCAD rose on Thursday as a report showed new home starts declined more than expected last month.
Two-sided fundamental data is keeping the USDCAD in a range. Strong surges in crude oil, because of its strong link to Canadian exports, is keeping the Canadian Dollar afloat while poor economic data is attracting selling pressure.
Friday's employment report coupled with a weak energy market could prove to be bearish for the Canadian Dollar.
Trend traders are having the hardest time trading this market as the fundamental focus shifts almost daily. The best scenario for a bullish USDCAD trade would be a bearish Canadian economic report and a top in energy.
The economy has been cooperating with a series of weak reports. All it is going to take to send the Canadian Dollar sharply lower is a sizeable break in the crude oil market.
Trade both side of the market, but begin to lean to the long side of the USDCAD especially if crude oil begins to weaken.
Bank of England Decides to Leave Rates Unchanged
On Thursday, the Bank of England decided to leave the key lending rate at 5%. This was somewhat of a surprise because Wednesday's poor housing number caused some traders to factor in an immediate cut.
If anything, the Bank of England is going to cut back on its hawkish comments regarding interest rates and the economy as the GBPUSD hovers near the low for the year.
Continue to look for more downside pressure, but do not be surprised by periodic short-covering rallies as the bulls try to pick a bottom.
Please do not hesitate to contact us at 800-971-2440, with any questions.
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