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The EUR/USD gave back most of Friday’s gains in early European trade as expectations of a possible rate hike from the ECB faded quickly. Joaquin Almunia the EU Monetary Affairs Commissioner talking about the Eurozone inflation conceded that the region’s rate is likely to rise above the banks self imposed barrier of 2.0% to 2.5% in August. However, Mr. Alminia also noted that “if inflation expectations do not rise rapidly then the ECB policy can be more gradual”, suggesting that any potential rise in rates may be a long way off.
The euro has been the victim of an ever widening interest rate differential to the dollar, a dynamic that has hurt the currency over the past 6 months as the carry spread now stands at 175 basis points against it. The ECB is trying to walk a very fine line between its mandate to control the budding inflationary pressures in the Eurozone and its desire to nurture the nascent economic recovery in the region where the unemployment rates stands at nearly 10%.
In UK the housing prices appear to have stabilized after Rightmove released its survey showing that prices rose 1.5% on a year over year level. Housing continues to be key to the strength of the UK economy as any rapid depreciation in values will likely have a catastrophic effect on consumer spending. UK Retailers are already sending out gloomy signals with high street sales at their weakest in two decades, according to one of the industry's most senior analysts. Verdict Research, headed by Richard Hyman, forecasts that retail sales in value terms will rise by just 2.1% in the last three months of 2005, compared with 3.3% growth a year earlier.
In addition to retail worries the pound came under attack today after news that MPC hawk Andrew Large will be leaving in January. According to IFR “Large voted for 25bp UK rate hikes on three separate occasions earlier this year (March through May), being in the minority on each occasion. He also voted against August's 25bp cut.”
Boris
Boris Schlossberg serves as Senior Currency Strategist with Forex Capital Markets in New York, the largest retail forex market maker in the world. He is a monthly contributor to SFO Magazine with articles focused on understanding proper risk management, trader psychology and true market structure. He is also a featured expert at www.fxstreet.com and a frequent commentator for the Marketwatch From Dow Jones Currency and Bond Report sections.
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