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ECB Press Conference Bullet Points

Written by A Forex View From Afar on Thursday, June 05, 2008

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ECB Press Conference Bullet Points:

• It’s possible, but not certain for a small rate increase in the next meeting
• Risks to price stability over the medium term have increased further
• Inflation rates have risen significantly
• HICP inflation is now expected to remain high for a more protracted period
• upside risks to price stability are confirmed by the continuing very vigorous money and credit growth and the absence of significant constraints on bank loan supply up to now
• economic fundamentals of the euro area are sound
• strong determination to secure a firm anchoring of medium and long-term inflation expectations in line with price stability.

• Q1 GDP growth of 0.8% was well above expectations, due to temporary factors
• The high growth rate in the first quarter might be partly offset in the second.
• domestic and foreign demand are expected to support ongoing real GDP growth
• robust growth in emerging economies should support euro area external demand
• Euro area does not suffer from major imbalances
• employment and labor force participation have increased significantly, and unemployment rates have fallen
• Euro-system staff macroeconomic projections: 1.5% and 2.1% in 2008 and between 1.0% and 2.0% in 2009.
• uncertainty surrounding this outlook for economic growth remains high
• risks continue to relate to the potential for the financial market turbulence to have a more negative impact on the real economy
• The annual HICP inflation rate is likely to remain above 3% for some time to come
• Euro-system staff projections foresee average annual HICP inflation at between 3.2% and 3.6% in 2008 and between 1.8% and 3.0% in 2009. Higher from the previous estimations
• the outlook for prices remain clearly on the upside and have increased further
• Inflation risk comes from market segments with low competition, such as parts of the services sector
• M3 growth remained very vigorous
• annual M1 growth has continued to moderate in recent months
• monetary analysis points to upside risks to price stability at longer horizons
• availability of bank credit to households and non-financial corporations has not been significantly affected by the turmoil.

Above all, the most important thing said is the case of hiking rates next meeting, by a small percent. Mr. Trichet said a rate hike is possible, but not certain, and referred to a small percent as inline with what we had before, meaning 25 basis points.

This obviously is a first, practically going against the recent trend of cutting rates. Doing this, the ECB wants to reconfirm its goal of maintaining price stability over the medium term (18 to 24 months).

It should be noted that the rate hike story comes a month after Mr. Trichet said that rates were in the right place. But at that time, the euro wasn’t in the right place, breaking above the 1.600 resistance.

Since Mr. Trichet spoke about the possibility of a rate hike, the eur/usd gained more then 150 pips. It seems the euro may regain the upside momentum once again, but if the HICP release comes in weaker then expected we may see some profit taking.

Asked about the commodities prices, Mr. Trichet said at first they were demand driven, but now they are certainly speculative.

Another thing that should be noted is that Mr. Trichet made a subtle reference to“Inflation risk comes from market segments with low competition, such as parts of the services sector”. Mr. Trichet has said this line for some time, but there was something new here by saying “parts of the services sector”. Usually references to the financial sector point out to the financials. I wonder if the ECB and EU are cooking something for themselves here.

The clarity is a refreshing thing, the timing is strange, but out of it all we, as forex traders, know that the market's fair value on the Eur/Usd is around 1.5600. Traders may now want to plot their paths from that pivotal point. Whether you see it as Long or Short, overbought or oversold, it makes no difference, there will be trades both sides of it, but just keep that number in mind and monitor how far away from it the speculative interest can take this.

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