Inflation in Europe and the Dollar trend
Written by A Forex View From Afar on Tuesday, January 08, 2008Back to www.thelfb.com
Inflation in Europe and the Dollar Trend; It may not be what you want to hear.
Full Details and Analysis. Please add your Comments.
Inflation is sweeping through Europe, and the Central Bank, ECB, has to take an important decision this week; either to keep the current rate of 4.00% or to follow the US and UK and to cut Rates to counter the vicious effects of sub-prime lending.
Within the Industrial Production Prices, Energy Inflation is the biggest of them all, growing 7.8% a year, and 3.2% from one month before.
Inflation is out there, affecting the European price stability but also some other serious problems, like sub-prime, are out there, which by definition are appealing as deflationary. Even if the Euro-area hasn't been already been hit by the sub-prime, except UK, the global environment has been, and it has to follow the trend, to provide liquidity to the markets.
Now, the Euro-Zone may not need a Rate cut, but neither does it need a Rate increase. Reaching price stability over the long and medium term can be done without having to adjust the main Interest Rate. It can be reached, even temporarily, by steering short term Rates, influencing money markets or the best method of them all, using fiscal policy (what US is trying to implement now).
Traders are expecting that Mr Trichet will use the word "vigilant" in his speech at 08:30 EDT as many times as he can, doubled by words like "strong,” “continued” and “extremely", his usual Hawkish lines. His words will be complemented by the usual volatility in price valuations on the Euro based Pairs.
As we covered in our Broadcasts and Alerts, the Markets are now caught in channel and until the Interest Rate decisions, any major breakouts will come with huge volume if they are to hold.
Even if most Traders say that the US is going into recession, the Dollar is now getting support from traders buying Bonds. They could also expect the Dollar to get a boost from Mr. Bush's plan to cut taxes in order to help consumers.
We are really curios if this will lead to obscurity over time, like the SIV Super Fund maybe.
"Dollar slightly positive"
You can watch Trichet speech here: http://event.netvision.de/basic_dispatching/?ecb_080110_stream_video
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