A Forex View From Afar

ECB Press Conference Analysis: Inflation is still the main problem. Now add lower growth

• Inflation rates are likely to remain well above the price stability levels
• Risks to price stability over the medium term remain on the upside
• Real GDP growth figures for mid-2008 will be substantially weaker
• Weakening in GDP growth due to factors such as slower expansion at the global level and dampening effects from high and volatile oil and food prices
• Growth in the world economy, while moderating, is expected to remain relatively resilient
• Fundamentals of the euro area are sound and the euro area does not suffer from major imbalances
• Household disposable income and consumption, are unlikely to compensate the loss of purchasing power
• Uncertainty surrounding this outlook for economic activity remains high
• Very high and volatile levels of commodity prices and the ongoing tensions in financial markets
• Downside risks continue to relate to the potential for the financial market tensions to affect the real economy more adversely than currently anticipated
• Annual HICP inflation has remained considerably above the level consistent with price stability
• Annual HICP inflation rate is likely to remain well above a level consistent with price stability based on current futures prices for commodities
• Risks to price stability at clearly on the upside and have increased over the past few months
• Monetary analysis confirms the prevailing upside risks to price stability
• growth of broad money and credit aggregates is showing some signs of moderation
• The current yield curve has led to rapid increases in time deposits and to a substantial decline in annual M1 growth

Once again, Mr. Trichet put a lot of pressure on the inflation problem, but at the same time he underlined the fact that the economy will weaken in the second and third quarter. It seems the market had interpreted this detail as a rate cut may be possible. During the speech, the euro fell more than 70 pips, creating a lot of volatility on its way down.

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