Tuesday May 20, 2008 - 10:24:10 GMT
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Forex Research - Euro Rallies Despite Weaker ZEW As Talk of Rate Hikes Resumes - Will ECB Actually Tighten?
After German Producer Prices increased at the fastest pace in 2 years, EURUSD recouped all of yesterdayâ€™s losses in early European trade but the rally was temporarily stymied by worse than expected reading from the ZEW survey
â€˘ Japanese Yen: BOJ Leaves rates at 50bp
â€˘ Euro: PPI hot but ZEW misses
â€˘ Pound: trading in euroâ€™s shadow as calendar empty
â€˘ US Dollar: PPI on tap
After German Producer Prices increased at the fastest pace in 2 years, EURUSD recouped all of yesterdayâ€™s losses in early European trade but the rally was temporarily stymied by worse than expected reading from the ZEW survey indicating concern about future growth from the regionâ€™s investment analysts. The correction however, lasted all of 10 minutes as the pair skyrocketed once again after ZEW officials predicted that ECB will hike rates in the near future.
German PPI printed at 1.1% -far hotter than the 0.5% expected as the spike in energy costs continued to disperse inflationary pressures throughout the system. The EURUSD gained steadily throughout the night on anticipation of better than forecast Zew readings but the actual report produced mixed results with sentiment dropping to â€“41.7 while current conditions improved to 38.6 from the 32.0.
The real kicker of the night however was the comment by Wolfgang Franz, head of the Mannheim-based ZEW stating that, â€ś"I think the ECB will raise interest rates in the near future". For a market mildly positioned for a possible ECB rate cut as early as Q3 of this year, Mr. Franzâ€™s words came as a shock triggering a stampede of short covering as traders tried to reassess their views of future monetary policy in the Euro-zone.
Whether ECB will actually tighten further this year remains an open question, but given tonightâ€™s hot PPI numbers and hawkish comments from Zew officials at the very least it appears quite unlikely that the ECB will consider a rate cut anytime in the near future. The case for a weaker euro has been predicated on the idea of substantial deceleration in EZ economic growth. However the slowdown in demand has been relatively modest while inflationary pressures in the region have been unremitting and brutal. Tomorrowâ€™s IFO report may hold the key to near term direction for the pair. If the data prints within expectations or better the EURUSD rally could easily continue as ECB uncompromisingly hawkish monetary policy will likely remain in place for the foreseeable future.
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: firstname.lastname@example.org
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