Friday January 12, 2007 - 11:14:32 GMT
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INVESTICA Ltd - www.investica.co.uk
ECB stance hurts Euro
The dollar will need to consolidate, but a robust US sales report could trigger a move to at least 1.2850.
The Euro briefly pushed above 1.30 against the dollar after the UK interest rate decision as Sterling buying against the dollar spilled over into wider US currency selling. The Euro was unable to hold the gains and weakened significantly to lows around 1.2885 later in US trading. The dollar drifted back towards 1.29 in early Europe on Friday in subdued trading.
As expected, the ECB left interest rates at 3.50% following the latest interest rate decision. In the news conference following the meeting, the ECB stated that policy was still accommodative and that inflation risks needed very close monitoring.
Trichet avoided the use of the word vigilance and this will dampen expectations of an increase in interest rates next month, especially as he pointedly referred to the fact that vigilance was omitted. Markets had effectively priced in a February rate increase while the comments suggest a March increase is more likely. The downgrading of expectations will tend to undermine the Euro in the short term, although heavy selling is unlikely.
As far as the US is concerned, jobless claims fell to 299,000 in the latest week from 325,000 previously which will reinforce confidence over the labour market. The retail sales data will be watched closely on Friday, especially as the strong data last month was an important catalyst in improving underlying dollar sentiment. A monthly drop in sales would provide a stern test for dollar optimism while a headline increase above 1.0% would fuel further dollar buying as there would be slightly greater expectations of a US rate increase this year.
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