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Trichet Offers No Cheer for Euro Bulls

Last updated 7/2/2009 9:50 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

The ECB kept its refinancing rate at 1% and at the post announcement press conference ECB President Jean Claude Trichet essentially reaffirmed many of the policy points  made in the past but refused to comment directly on the issue of encouraging credit expansion in the EZ which may be hurting the recovery efforts in the region.  In his prepared remarks Mr. Trichet noted  that the current interest rate is appropriate, that economic growth  will likely remain weak for the rest of the year and unemployment will continue to rise.

Mr. Trichet was particularly dismissive over the deflationary signals in the EZ economy, noting that the negative rates seen in today’s PPI readings are a natural result of the recent economic contraction  and will return to positive territory soon.  We are highly dubious of ECB’s thesis  on this subject given the fact that producer price levels have been negative for 10 months in a row and are likely to remain that way for the foreseeable future.  The ECB’s Budenbank-like focus on inflation and price stability strikes us as woefully antiquated as higher unemployment and the likely slowdown of global recovery in H2 of 2009 will result  in further deflationary pressures on the EZ economy.

Mr, Trichet was also challenged on the issue of “transmission mechanism” with reporters noting that despite the recent massive $400B+ 1 year term auction by the ECB, bank lending in the region remains lackluster with more than half the proceeds from the facility returning back on deposit to ECB.  Mr. Trichet refused to discuss what additional policy plans if any the central bank will undertake to stimulate lending in the region noting only that the governing council  trusts that the member banks will respond  properly to the monetary stimulus offered by the central bank.

Finally, Mr. Trichet reiterated the fact that the 1% refi rate does not represent a floor on rates, but his comments did not in any way suggest that the ECB was considering lowering rates any time soon. In fact the ECB is unlikely to even entertain the idea unless the economic situation on the ground deteriorates markedly. Overall, Mr. Trichet’s press conference provided no fodder for euro bulls  and the price action in the EUR/USD reflected the generally downcast tone of the message with the pair drifting  towards the key 1.4000 level in the aftermath of the report.  The pair may test the support level at the figure once the 10:00 AM New York option fixing barriers  pass.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.