Monday June 23, 2008 - 10:43:07 GMT
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Forex Research - Euro Back to 1.5500 as IFO, PMI Plummet - Will ECB Really Hike Rates?
EURUSD dropped more than 100 points from its open in Asia today after a
slew of economic data surprised to the downside confirming the bearâ€™s
long held thesis that the regionâ€™s economy is beginning to buckle
â€˘ Japanese Yen: weakens as BSI falls the most in four years
â€˘ Euro: IFO PMIs plummet taking it back to 1.5500
â€˘ British Pound: Dovish Sentence comments weigh
â€˘ US Dollar: No Data on Tap
Euro Back to 1.5500 as IFO, PMI Plummet â€“ Will ECB Really Hike Rates?
The EURUSD dropped more than 100 points from its open in Asia today
after a slew of economic data surprised to the downside confirming the
bearâ€™s long held thesis that the regionâ€™s economy is beginning to
buckle under the dual weight of high exchange rates and high energy
prices. EZ Manufacturing PMI slipped to below the 50 boom/bust line for
the first time in more than 2 years dragged lower by the sharp decline
in French readings. In addition, the IFO survey fell more than
expected printing at 101.3 versus 102.5 and considerably worse than
Mayâ€™s reading of 103.5
The euro which rallied at the end of last week on uber-hawkish rhetoric
from ECB officials indicating that a rate increase next month is a
foregone conclusion, returned to the familiar 1.5500 level as doubts
crept into traderâ€™s minds regarding the certainty of the rate hike.
Although over the past two weeks nearly everyone at ECB from President
Trichet on down has echoed the common refrain that inflation remains
too high necessitating further tightening, economic reality may temper
any immediate plans to raise rates.
With energy costs soaring and high exchange rates making price hikes a
major challenge to most European businesses does ECB really want to
take this opportunity to put a chokehold on credit? EZ businesses rely
on bank financing much more that US companies. Therefore an increase in
the central bank call rate, were it to go through, would likely
exacerbate the damage to European economic growth in the second half of
The answer to this question most likely lies with the price of oil. If
crude continues to trade above $130/bbl the ECB may feel compelled to
act despite the damage to growth, fearing the impact of persistently
elevated inflation expectations. If on the other hand, oil prices
start to ease this week dropping to $120/bbl or lower, the monetary
authorities in Frankfurt may chose to stand down for another month.
Meanwhile, the North American calendar is barren for the day and
therefore the US session may be dominated by the reaction to the IFO
news and the action in the NYMEX pits. By the middle of the week
attention will turn to the FOMC meeting and its consequent statement,
but for now the markets should continue to digest the latest economic
news from Europe.
Will ECB Raise Rates? Join us in EURUSD Forum
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