Forex Trading

The euro will jump stronger on Thursday if the ECB increases interest rates, although it is much more likely that rates will be left unchanged at 3.75%.Assuming rates are unchanged, the main focus will be on ECB President Trichet’s press conference following the decision.Trichet is likely to take a firm stance on inflation, especially as Euro-zone growth indicators have remained robust, while money supply growth has also remained high.

Trichet’s language will be watched very closely and use of the term ‘strong vigilance’ on inflation would signal a high risk of a May increase in rates which would support the Euro.A more measured and balanced stance by Trichet would indicate that the bank is prepared to wait until the June meeting. There will be some risk of internal divisions within the ECB as countries such as Italy will protest against the combination of rising interest rates and strong currency. Hints over divisions would undermine the Euro, although they are unlikely to be made public at this stage.

Markets will be on alert for warnings over Euro strength, although Trichet is likely to concentrate on more general warnings over risk rather than protest against Euro strength, especially as the strong currency will also help tighten monetary policy.A very important factor is that the futures markets have already priced in at least two further interest rate increases to 4.25% which will increase the risk of at least a limited Euro correction weaker.
Analysis by Investica LTD source : www.forexfactory.com