In yesterday's Daily Currency Focus, we said that the 1.45 level was significant support in the EUR/USD.A break below that level would have opened the door for a move down to 1.42. Even though the EUR/USD did take out the support to hit an intraday low of 1.4385, what was more impressive was the currency pair's reversal. The close back near today's high reflects strength rather than weakness.
The European Central Bank interest rate decision is the wildcard tomorrow.The recent decline in the Euro suggests that the market is expecting the ECB to be dovish despite their clearly hawkish rhetoric. Traders are looking at the price of oil and the recent Eurozone economic data and drawing the conclusion that the ECB can no longer be stubbornly hawkish.Second quarter growth and retail sales were both weaker than expect.Although service sector PMI was revised higher, it still remains in contractionary territory.
Keeping interest rates on hold at 4.25 percent is a given, but Euro bears may be disappointed by Trichet's press conference.If the ECB is dovish, it would be in line with the recent price action in the Euro, so the risk is hawkishness.The ECB is not a central bank to fade – their job is to stabilize the economy and not to induce volatility.If they say that they are hawkish, there is no reason to doubt them.Recent comments from members of the Governing Council indicate that even though economic growth is slowing, the ECB expects activity to pick up next year.With a strict inflation mandate, they are much more worried about inflation feeding into wage and price setting behavior. Before shifting their stance, they may want to see oil prices remain at current levels for at least another month.
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