European Inflation Brings Bid Back to The Euro

Talking Points                                              <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

·          AUD Consumer Confidence slips markedly

·          EUR Inflation considerably above 2.0% ECB target

·          <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />UK Labor data lackluster

·          US CPI on deck

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The EUR/USD made a stab at a recovery in early European trade today after seven straight days of declines when both French and Italian CPI data printed considerably above the 2.0% target set by the ECB. The French data registered a 2.4% year over year increase while Italians reported  a gain of 2.3%. The news was strong enough to temporarily send the pair above the 1.2600 figure but it has since retreated from that level. Overall the data clearly indicates that inflationary pressures continue to percolate throughout the region and will likely elicit another 25 basis point rise from the ECB within the next several months.

Today, however, attention will turn to the other side of the Atlantic as US CPI figures are scheduled for release at 12:30 GMT. The market anticipates a 2.3% year on year gain ex food and energy.  Should the numbers print a but softer market expectations regarding a 25 basis point Fed rate hike in June may recede a bit, but  given the fact that most FOMC members have stated that the PCE is their preferred measure of inflation and considering that most recent Fedspeak has been decidedly hawkish the chances of a hike to 5.25% remain strong unless todays results provide a major surprise to the downside. Of more interest however, is the speculation in the market regarding what happens after the June meeting.  Many traders believe that this may be the last Fed hike for the year as the risks of tipping the economy into a recession may outweigh the need to control inflationary pressures. One positive factor for inflation doves is the price of crude which has traded below the $70/bbl handle for several days in a row. Should it continue to trade lower it would alleviate the primary inflationary concerns of most of the hawks on the FOMC.

Meanwhile across the Pacific, the drama swirling around Governor Fukui (prior to becoming the BoJ chief, Mr. Fukui invested funds with a  money manager accused of insider trading) threatens to become a sideshow that may temporarily weigh on the yen. Although Mr. Fukui is cleared of any foreknowledge of the crime, questions have arisen regarding the timing of the liquidation of his investment. In culture where even the appearance of impropriety is viewed with scorn, some market players feel that Mr. Fukuis personal troubles may prevent him from  acting freely on the issue of ZIRP. However, should the whole matter turn our to be a tempest in teapot the move in USD/JPY above the 115.00 level could turn out to be short lived as Japanese fundamentals continue to point to a lift of ZIRP.

FX Upcoming