ECB Prepares to Battle Inflation
04-03-2011
The Euro dominated the currency markets on Thrusday, following the ECB's press conference. Trichet called for strong vigilance to battle inflation said a rate hike at their next meeting in April was possible. The Euro broke out to its highest level since November, although the move up was limited, as traders had expected a hawkish response from Trichet. Inflation has far overshot the ECB's 2% target, as low interest rates, spiraling oil costs, and a recovering economy take their toll on prices.
The European situation is quite complex, given the divergent state of the Eurozone economies. The sovereign debt crisis is certain to reemerge in the coming months, and rising interest rates will only confound the problem for those member states.
In the US, weekly jobless claims were surprisingly low, dropping to 368K, their lowest level since May 2008, and well below analyst estimates of 394K. Wednesday's ADP employment report also surprised to the upside, implying that Friday's non-farm payroll data may show robust job growth. Last month's report was hazy, as job growth disappointed, while the unemployment rate dropped. The conflicted data undermined the report's significance. Analysts expect the unemployment rate to remain at 9.1%, and are looking for job growth of 191K.
Venezuela proposed a peace deal for Libya which was taken under consideration, sending gold tumbling 1.8%. Although it is unlikely that such a proposal will bear fruit, the news sensitive market reacted swiftly. The potential for interest rate increases also contributed to the declines, as gold is seen as a hedge against inflation.
The Swiss Franc dropped .9%, the biggest mover amongst the major currencies, and the Yen dropped .7%. The confluence of a drop in gold, the spike in the Euro, and the upbeat jobs report encouraged investors to exit these safe-haven currencies.
US non-manufacturing PMI data was slightly better than expected, and the Bloomberg Consumer Comfort index rose to its highest level in 3 years.
Aside from the US employment data, Friday's reports will include the Halifax Home Price Index for the UK, the Ivey School of Business's PMI report for Canada, and US Factory Orders.
