Euro Rallies on Trichet’s Hawkish Tone
June 5, 2008
The ECB conformed to market expectations and left interest rates unchanged at 4.00% for the twelfth consecutive month. Eurozone inflation surged to 3.6%y/y last month, the highest level for almost 16 years on the back of soaring oil prices, all but ruling-out any cut in the European Central Bank interest rates. However, Eurozone growth is showing increasing signs of slowdown with both the manufacturing and service sectors lingering dangerously close to contraction last month. The domestic slowdown was exacerbated by weakening demand for EU exports due to slowing overseas demand and the effects of a strong Euro. In the following news conference ECB President Trichet’s comments were extraordinarily hawkish as he suggested a possible rate hike in July. Following Trichet’s comments the Euro was able to pair back all of its earlier losses against the USD, trading nearly 1.5% up on the day.