The ECB meeting and more importantly the press conference that followed was the main event of the trading session. Trichet comments were very hawkish generating thoughts that a rate hike could be in the cards at next month’s meeting. Euribor and Bunds fell immediately and the Euro soared against the dollar the Yen and the Pound. Although many observers have been critical of the July 2008 rate hike decision, Trichet has referred to it as an important decision, displaying his anti-inflation credentials.
Mr. Trichet warned that risks of inflation in the euro zone “are to the upside” and that “strong vigilance” is required to ensure that the rise in commodity prices recently doesn’t translate into a generalized increase in inflation. “It is essential that the recent rise in inflation does not give rise to broad-based inflationary pressures over the medium term,” Mr. Trichet said at a press conference following the ECB’s governing council meeting. An increase in official interest rates next month “is possible,” he said.
Along with this news, the EMU release two different data points of significant. GDP was released showing a 2% year over year gain, in-line with expectations. Additionally, Retail Sales for January showed an increase of .4% month over month, which was also in-line with expectations.
The Euro broke out above the 1.3860 resistance level, and is now poised to test the 1.4250 resistance level.
The UK service PMI did not match robustness of the manufacturing (and construction) PMI. The miss has moved the Pound below 1.63 against the dollar and Sterling also lost ground against the Euro. The service PMI came in at 52.6 down from 54.5 in January and market expectations for 53.7. The service sector accounts for around 70% of the UK economy and so the disappointment may blunt the impact of the earlier reports. Markit, which conducts the PMI survey, opined that the data is consistent with 0.3% growth in Q1 rather than the 0.4% they previously reported.
In the US, better than expected Jobless claims helped lift riskier assets including stocks and help the dollar gain some ground against the Yen. Initial jobless claims fell by 20,000 to 368,000 in the week ended Feb. 26, according to the Labor Department. It was the lowest level since May 2008. The previous week’s figures were revised down to 388,000 from an original estimate of 391,000. Economists surveyed had expected claims would rise by 9,000 to 400,000. Tomorrow the markets will be watching the monthly employment report (1330 GMT). Expectations are for an increase of 183 thousand jobs. A higher than expected number should continue to help the dollar against the Yen.
