Euro – Will Sour Sentiment or Hot CPI Drive Direction?

From: DailyFX, Monday, 12 November 2007 04:35:51 GMT

There was little doubt that the European Central Bank would leave rates steady at 4.00 percent last week, but ECB President Jean-Claude Trichet's hawkish tone during his monthly press conference helped keep EUR/USD bid. In Trichet's commentary, he indicated that the central bank was very worried about inflation, but stopped short of using the phrase "strong vigilance," which is his key term to suggest an impending rate hike the following month. At the same time, Trichet said that oil and commodity prices could weigh on growth, and that uncertainty surrounding the ongoing reappraisal of risk in the financial markets prevents them from making policy adjustments at this time. As a result, it has been made clear that the ECB wants to wait to gauge the status of the financial markets before deciding what to do next with interest rates, so traders are not expecting a move in December. However, additional signs that CPI is accelerating much faster than the ECB's 2 percent target rate will keep Trichet & Co. on edge. Looking ahead to this week, price action in EUR/USD is unlikely to be determined primarily by economic data out of the Euro-zone as the pair remains the domain of dollar sentiment. Nevertheless, traders should watch European releases for indications that the ECB may change their stance going forward. The ZEW surveys for both the Euro-zone and Germany are expected to show that investor sentiment soured in November amidst instability in the financial markets and concerns that the ECB will eventually hike rates again. On Wednesday, third quarter GDP figures for the Euro-zone are forecasted to be revised up to 2.6 percent, reflecting a pick up from the 2.5 percent pace in the second quarter. On Thursday, CPI is likely to be released in line with the initial flash estimates at a pace of 2.6 percent, well past the ECB's 2.0 percent target. Overall, fundamental releases at the end of the week could support the case for additional EUR/USD gains, but the pair may find itself correcting lower first.