chf fundamentals

European Central Bank Keeps Rates Unchanged

Thursday, 12 April 2007 21:23:24 GMT  |  Kathy Lien, Chief Strategist

Just as the market expected, the European Central Bank left interest rates unchanged at 3.75 percent.  Notably absent from ECB President Trichet’s commentaries were the words “strong vigilance.” Instead, he said that interest rates remain accommodative and given their optimistic outlook for growth and their belief that inflation will continue to remain high, they will need to act in a firm and timely manner.  The last few times that Trichet used the words "firm and timely manner" without the words "strongly vigilant," rates were not increased in the following month.  So basically, the central bank head is telling us that he will most likely postpone the rate hike to June.  When pressed for an answer on whether a June rate hike would be their last, Trichet simply said “we will see when the time comes.”  If the Euro continues to rally we still believe that it will be very difficult for the ECB to raise rates again.  However, for the time being, by not closing the door on taking rates beyond 4 percent is enough for the market to run out and buy Euros.  This demand took EUR/JPY to a fresh record high and the EUR/USD to a new 2 year high.  The technical and fundamental break in the currency pair puts the odds in favor of a test of the December 2004 1.3667 high.  Remember, yield is king and with one guaranteed rate hike and the possibility of another, the Euro has wind behind its back. 

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