Thursday March 3, 2005 - 11:09:32 GMT
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INVESTICA Ltd - www.investica.co.uk
What to expect from the ECB
The dollar strengthened to a high just beyond 1.3090 against the Euro on Wednesday, but was unable to sustain these gains and edged back to 1.3135 in New York on Wednesday. There was little change in early Europe on Thursday before a dollar retreat to 1.3150.
Fed Chairman Greenspan was generally optimistic over the economic growth trends, but he was slightly more cautious than expected and issued no warnings over the risks of a more aggressive Fed tightening. Greenspan also paid relatively little attention to the economy and he chose to concentrate on the issues of the budget deficits. He warned that the deficits were unsustainable and called for spending cuts by the administration. The Greenspan comments on the budget will unsettle the dollar slightly by reviving unease over the budget and current account deficits. There will still be caution ahead of the important Friday US employment report. Markets are expecting a strong report with rumours of a high figure during Wednesday and this will encourage a covering of any short US dollar positions over the next 24 hours, but much of the impact should already have been seen.
There was fresh speculation that the ECB would downgrade the GDP growth forecasts in its Thursday report and this hampered the Euro, especially after recent disappointing data. It is very unlikely that the ECB will cut rates, but the comments will be important. The money supply and credit figures suggest that monetary policy is certainly not too tight and also suggests a tightening could be required, but this is not being backed up by the growth data. The ECB stance will, therefore, be important and the Euro will weaken if there are hints of concern over growth. Conversely, a tough stance on inflation would support the Euro. The Euro-zone PMI index for the services account was slightly weaker than expected at 53.0 from 53.4 in January. The ECB is likely to maintain a steady policy, but is likely to signal some inflation concerns.
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