Euro Rises As Inflation Picture Worsens, Will ECB Raise Rates?

Published June 20th, 2008 - 01:05 GMT

Talking Points
•    Japanese Yen: Consolidates Above 107.70
•    Euro: Inflation Data Sends Pair Above 1.5550
•    Swiss Franc: Producer & Import Prices Unexpectedly Rise
•    Canadian Dollar: Retail Sales On Tap
•    US Dollar: No Data on Tap



The Euro firmed as the inflation picture worsened in Europe. German producer prices rose 6.0% form 5.2% on an annualized basis-the fastest pace in almost two years. Also, French wages increased 1.1%, which was the highest on record. However, an unexpected jump in Swiss producer & import prices generated the greatest Euro bullish price action. The measure of prices for factory and farm goods rose 3.9% from 3.6% a year earlier. Adding to the Euro bullish picture was a 12.8% year-over-year jump in Italian industrial orders from -3.7% the month prior.

The jump in Swiss prices casts doubt on the SNB’s contention that inflation is transitory. The central bank’s statements following their rate decision and the $5 drop in oil prices following China’s fuel price hike, provided dollar support as speculation increased that energy prices may have peaked. However, the firming of oil prices and the hotter than expected inflation data has weakened that argument and increased the likelihood that the ECB may hike rates. The anticipated demand destruction for oil has shown little signs of materializing, and industry insiders maintain that the fundamentals continue to support current prices. Therefore, as long as energy costs remain at their elevated levels, the price stability mandate of the central bank will force them to seriously consider a rate increase.

BoC Governor Carney’s signaled that future easing isn’t being contemplated by the MPC, when he stated there needs to be a “relentless focus on inflation”. Canadian retail sales are expected to have improved in April, which will give the central bank breathing room to weigh the upside risks of inflation, before deciding future policy.

The U.S. economic docket is bare and therefore the dollar will be at the mercy of underlying themes. Oil prices figure to have significant sway over dollar sentiment again. If prices rise following yesterday’s drop, the potential impact on the world’s largest consumer of fuel’s economy will support the current pessimistic outlook and weigh the dollar.

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