As expecetd the ECB hiked rates to 4.25% but the key question going forward vis a vis the euro will be – one and done or more to come? President Trichet has continually insisted that the ECB is not about to engage in series of rate hikes and that this policy action was meant only to anchor intermediate term inflation expectations.
Nevertheless, pricing pressures in the 15 member union show no signs of easing as oil continues to trade at record highs. If oil remains above $140/bbl for a prolonged period of time or worse if crude breaches the $150/bbl barrier EURUSD could easily trade through its record highs of 1.6020 as traders begin to price in more rate hikes.
Although European economic data is starting to show sign of deterioration with tonight’s EZ PMI Composite reading slipping to 49.3 (the first time it dropped below the 50 boom/bust line in 3 years) the performance of the overall economy is relatively strong especially versus US. Most importantly, for the time being the labor markets in Europe continue to expand leaving the ECB free to pursue its tightening bias. Therefore, inflation considerations rather than growth issues are likely to guide ECB monetary policy in the near future and if price pressures continue to mount, chance are good that ECB may have to raise rates once more before the year end.
