Who got it wrong?
Written by A Forex View From Afar on Monday, February 25, 2008Back to www.thelfb.com
In the last few days, some news-sources have started to say that financial markets have got it all wrong, and Mr Trichet, the Head of the ECB, will not cut this year. This claim is supported by economists at Merrill Lynch, Goldman Sachs Group Inc., ABN Amro Holding NV and Morgan Stanley.
"The gap between market expectations and the ECB's thinking is unusually wide".
We cannot dismiss this line, we have the same ideas here as well, but still do not know why they consider that they Markets got it wrong. It seems that it was only a small number of retail traders and a small number of Annalists saying this, and not the stream of people that the initial headlines indicate. Plus, if the markets really thought that the ECB will cut, they would have sent the Euro down, like they did with the Pound, and right now that is not happening.
Inflation is accelerating in the Euro-Zone, as seen in the chart above, but the best part is that Mr. Trichet warned about wage inflation coming from Unions around Europe, demanding higher wages. Guess what, they got those wage increases.
Back in 2006, inflation was around 2.5%, when the ECB gradual raised from 2.50% to 4.0%. Now inflation is at 3.1%.
It's just a hunch but I think as soon the US starts raising rates, or at least indicates that there are no more cuts, the ECB will follow in quick time. That now maybe equates to the Euro being around Fair Value.
Source:
Bloomberg: Trichet May Not Cut Rates in 2008, Say Merrill, ABN
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