Euro gains could extend until the end of December

With the European Central Bank rate decision on the table, as expected rates were increased last Thursday by 0.25 basis points to a five year highs at 3.50%, market now awaits Tuesday’s Federal Open Market Committee meeting. Will it change the short term course of US dollar events? Very unlikely. Euro is actually positioning to climb further, at least until the end of December, and possibly reach the highs at 1.3670 touched on December 2004.
ollowing latest comments by Mr. Bernanke, the Federal Reserve should either not touch interest rates at current level of 5.25%, nor substantially change its economic view. Actually, last week labour market report provides no reason for the Fed to move interest rates. While the average pace of job increase has slowed, the unemployment rate of 4.5% in November is at the lowest level of the last 5 ?years and supports the opinion that consumer spending could slow down but not stop completely. Then, the housing market is still correcting, jobs fell by 29.000 units in November, but latest data shows that it is still vital in some areas. Since February, the employment in the residential construction speciality trades has decreased by 109.000 units, but the non residential construction speciality trades have climbed. Last, the progressive increase of hourly earnings, +0.2% in November with an year-over-year increase of 4.1%, testifies that the risk of an inflation rate’s jump above 3% is actual.

If Thursday’s ECB rate decision was largely anticipated due to some predictable language by Mr. Trichet, future timing for a new rate increase appears more nebulous. At the press conference, Mr. Trichet adopted a slightly softer tone, avoiding to make any clear comment on the euro and the yen. He simply repeated that G7 disorderly movements were not desirable. He was optimistic about the economy and consistent on rates. But, he made clear that it would be wrong to assume ECB would rise rates in February of 2007. With all the options still open, what will the next ECB move be? In the recent past, Mr. Trichet underlined the importance of monetary indicators in deciding ECB policy. Healthy economic growth in Europe and the sustained high growth rates in money supply and credit are possibly keeping ECB on the tightening course in the first part of 2007. Inflation is still a risk, despite recent interventions, considering the important liquidity created in the Euro zone.