ECB Pres. Trichet's Comments Sink Euro, As ECB Hints At 'One-and-Done' Move

Daily Forex Fundamentals | Written by CMS Forex | Jul 04 08 01:09 GMT |

EUR Retail Sales Surprise in June, Climb 1.2% in May

In the Euro-zone, retail sales surprised forecasts on the upside in May, increasing 1.2% on the month and turning positive in annual terms at 0.2%. With the Euro-zone economy losing its momentum however, the good result may prove temporary.
EUR Services PMI Contracts in June, Final Version Revised Lower to 49.1

Activity in the euro-zone sector contracted in June, falling to 49.1 from May's 50.6. The final version was lower than the preliminary release from last Monday.
UK Services Falls to Lowest Level Since October 2001


In the UK, the services sector also contracted, for the second straight month, posting a 47.1 for its PMI, the weakest level since October 2001. The UK economy has hit the skids as a collapse in housing lending, stemming from the US sub-prime mortgage, has turned into a full blown slowdown and possible recession.
ECB Raises Rates to 4.25%, First Move in 13 Months

In the late part of the European session, the ECB delivered its announcement on interest rates raising the rate to a seven-year high of 4.25% in order to combat red-hot inflation. It's the first move by policy members in 13 months. It comes despite signs, such as today's services data, that the economy is cooling. The increase was signaled far in advance, and was not a surprise to the markets as annual consumer inflation hit 4% in the June preliminary release.

The surprise to the markets came in ECB President Trichet's comments following the announcement. He signaled that the bank may have taken a one-and-done approach, and are not likely to start a series of increases. Those traders expecting a more hawkish stance on inflation were disappointed and the Euro-Dollar pair slid close to 200 pips prior to tomorrow's 4th of July holiday.

European stocks were negative to start their sessions but climbed into positive territory as anxiety about more ECB rate increases receded. The Euro-Yen pair succumbed to the Euro weakness however, stalling its recent rally, which was a recovery from its slide last week. From its intra-day high today, prior to Trichet's conference, the pair fell around 150 pips by 2:30 PM EST.

The Pound-Dollar slid 120 pips from its open as the Pound was pressured by its services report. At the NY open, the US release of nonfarm payroll data did not stop the Dollar's momentum. The Pound is now 200 pips lower than its high for the week at the 2 to 1 level seen on Tuesday.
US Sheds Jobs for 6th Month, Payroll Change at -62K

In the US, the nonfarm payroll report showed the economy shedding 62K jobs, the 6th straight month of job losses. The fall was very close to the forecast perhaps a relief after a weak ADP jobs report earlier in the week. May's figure, though, was revised down 13K. The unemployment rate remained at 5.5%. The job market seems poised to remain weak, which can lead to lower consumer spending and may keep the Fed from raising rates, despite higher inflation.

US stocks digested the job news and turned slightly positive by the middle of NY trading. With Dollar strength dictating the market today, the Dollar-Yen pair rose to a new weekly high of 106.90, recovering some of its losses from the end of last week.

The Dollar also managed to pare yesterday's losses against the Canadian Dollar. The US Dollar-Loonie pair had tested 1.01 yesterday, but jumped back above 1.02 today. The pair got caught up in general greenback strength, as some had feared a worse jobs report and a more hawkish ECB, which did not materialize. The gains also came despite a jump again by oil prices, which pulled back from a record near $146 per barrel.
Upcoming Releases

In upcoming releases, Germany will post its factory orders overnight, and the UK will release data on housing prices. Tomorrow, the US will be celebrating Independence Day, with national banks and stock markets closed for action. Canada ends the week with its Ivey PMI.

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com