Don’t Rule Out Another Rate Delay in the Euro-Zone

A signal that the ECB will raise the rates in July is widely expected from Jean-Claude Trichet in the press conference that follows the upcoming rate decision. But is everything so rosy? Here are 5 factors that could yield a surprising delay in rate hikes. ECB Preview and how this could impact euro dollar.

In May, Jean-Claude Trichet surprised the world by using the code words “very closely monitoring” regarding inflation. These code words were a signal that no rate hike will be seen now, in June. This triggered a huge fall in the euro and also in commodity prices. Trichet also pushed the dollar upwards.

Saying “very closely monitoring” was  interpreted  as a hint for a hike in July. And now, in June, Trichet is expected to use the code words “strong vigilance” to hint an imminent rate hike next time.

But some things have changed in the euro-zone. No, I’m not talking about the Greek crisis which is tearing the ECB and Germany apart. The ECB doesn’t see any restructuring in Greece and its policy tends to lean towards the situation in Germany and towards inflation. Well, worrying signs come from there:

1. Inflation is easing: Recent Euro-zone data has shown that the headline CPI has edged down from 2.8% to 2.7%. This is still above target, but this drop, for a change, shows that the situation isn’t so bad.
2. German unemployment drop stops: After many months of big drops in the number of unemployed people, the unemployment change figure in Germany hardly moved this time, quite disappointing.
3. German industrial production dropped: Fresh figures from the Euro-zone’s powerhouse show an unexpected drop of 0.6% in production during May.
4. German trade balance surplus lower: It was expected to show a surplus of 14 billion, but only 12 billion was recorded.
5. EUR/USD Exchange Rate: This is very important to note. The high exchange rate of the euro hurts German exports, and has triggered open talk of an overvalued euro from senior European officials. Also Trichet himself, in that same press conference one month ago, spent a lot of time quoting Bernanke and Geithner’s words about a strong dollar, and also said that the exchange rate is taken into account when the ECB makes its rate decision.

Before the previous rate decision, euro dollar was slightly higher than now. It fell from over 1.48 to under 1.40, but recovered once again.

Does Trichet want a weaker rate? Yes. Will he act help that happen by postponing the next rate hike once again? The market doesn’t think so. If he will do postpone it again, it will be a great surprise.

Further reading:

• Euro to dollar forecast – For all the events and technical analysis.
• What do the experts think? FXStreet provides an nice array of interesting opinions.