Inflation Forecast Trumps Strong Vigilance Comment, Euro Falls

Currency traders eagerly waited for the European Central Bank (ECB) press conference to learn whether or not the bank will raise rates at the next meeting.  At the start of Trichet’s statement, he stated that rates remain unchanged today, because inflation remains under pressure due to upward commodity and energy prices.  He said, “Uncertainty remains elevated, overall our monetary policy remains accommodative lending support to economic activity.” Within the first two minutes of ECB President Jean Claude Trichet speech, he said, “Accordingly strong vigilance is warranted.”  Those words signal for a 25 basis point rate hike to 1.50 percent at the next meeting on July 7th.  The euro initially rallied towards 1.4635 against the U.S. dollar.

The rise in the euro was short-lived after Trichet explained the 2012 forecast of harmonised index of consumer prices (HICP) decreased to a range of 1.1 and 2.3.  While expectations were growing for possible future rate hikes, 2012 rate hikes seemed less likely if inflation is below the target level of 2.0 percent.  The euro dropped over 150 points to the dollar before settling near the 1.4500 handle.  In the question and answer section of the press conference, Trichet also confirmed that next month’s rate hike will not be the beginning of a series of rate hikes.

The chart below identifies a potential head and shoulders pattern.  If euro weakness prevails and closes below the 1.4500 level, further downside targets include the 1.4421 level.

EUR/USD – 60 minute chart

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Edward J. Moya is the Chief Market Strategist for edmoya.com, an educational website for foreign exchange and commodity traders. He has over 15 years of investment industry experience in forex, stocks, options and futures. At edmoya.com, Mr. Moya writes daily currency and commodity analysis and has authored numerous articles on trading using both technical and fundamental analysis for major financial publications. He is a contributor of technical and fundamental analysis in currencies and commodities to SFO, Market News International, and Forex Factory.

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