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Euro Hits Yearly High as Trichet Signals Rate Hike

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Mr. Trichet noted that the current ECB projection calls for inflation to rise to a range of 2-2.6% for 2011 - above the central banks target rate of 2%. The ECB chief pointed specifically to increasing food and oil prices and pointed out that the current projections do not take into account the most recent price gains due to geo-political tensions.

Although Mr. Trichet signaled that a rate hike is coming in April he was careful to note that this was not the start of a sustained tightening program but rather a reaction to the current spikes in commodity prices. The ECB's "see-as-you-go" approach to tightening monetary policy may temper some of the speculative momentum in the EUR/USD if market participants view the move next month as a one off event, but it nevertheless provides strong support for the EUR/USD going forward as it indicates that the ECB will become the first G-3 central bank to hike rates since the global recession of 2008.

The ECB's policy move is buffeted by strong economic fundamentals in the region and Mr. Trichet referred to strong business confidence as supportive of economic activity going forward. As we noted earlier, "The sharp improvement in labor markets with employment rate now at multi-year highs along with strong PMI Manufacturing readings which have reached an 11 year peak have all contributed to sharp increase in consumer sentiment which is finally translating into a pick up in spending.The shift to a more balanced economic growth bodes well for future German GDP readings and eliminates concerns that any tightening by the ECB could cause an inadvertent slowdown in the EZ recovery. "

The EUR/USD rose to fresh yearly high of 1.3975 in the wake of Mr. Trichet's announcement but came off its peak on profit taking and defense of the psychologically key 1.4000 level. The pair may consolidate its gains in the near term, but given the clear momentum on monetary and economic front, EUR/USD should make another run at the 1.4000 figure within the next several days.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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