A ECB Reality Check

So here we sit on the cusp of yet another likely interest rate hike from the ECB. Is this an interest rate hike to slow down out of control growth or inflation? No. It is in the opinion of this analyst a confidence game being played by Trichet and friends in order to create a better value for the EUR when it actually should have a much lower one. Greece will never, mark the words NEVER be able to repay their obligations as they stand. A best case scenario is a ‘selective default’ by rolling over debt for longer periods of time. But eventually too they will likely lower their agreed to yields. Portugal will likely need more money soon. The ECB’s stated mandate is to watch over inflation that is true, but the inflation occurring in the E.U. is not because of domestic consumer demand it is because of core prices on energy and food rising.

Europe is furious at the Ratings Agencies, particularly Moody’s today, but the truth of the matter is the Ratings Agencies are probably right about European financials. Actually what is happening is that Europe is mad the ratings agencies are not protecting the European ‘Confidence Game’. Germany is in essence going to be counted upon to be the keeper for every ones bad debt. But at some point Germany will likely say NO MORE. The ECB is the holder of how much bad Greek Debt that they have bought on their own? How much total bad debt does the ECB own? Greece, Portugal, and likely Ireland are all in trouble for the next five to ten years. Spain’s banks still hold a hundred billion EUR of real estate on their books, which they refuse to let be revalued at known market conditions. Meaning that Europe and the ECB are collectively wishing upon stars and hoping all things work out in the end and Germany pays every ones bills long term. But returning to the opening, the ECB is about to raise interest rates into a broad economy that is not achieving any real growth at this time. The ECB move is may prove to be a misguided attempt at a confidence booster for investors via a better interest rate hike that in actuality will only make the long term financial suffering worse.

The EUR lost ground to USD on Wednesday even as investors generally recognize that the ECB will raise its interest rate today. The GBP has continued to be soft and the Bank of England is set to hold their monetary policy meeting today also. The U.K. economy continues to foster a haze of less than promising returns. The BoE is not expected to surprise anyone today and a dovish monetary policy is likely to continue.

The ISM Non Manufacturing PMI from the U.S. proved poor yesterday. Equities traded in a mixed fashion. Jobless data begins in earnest today with weekly Unemployment Claims and the ADP Non Farm Employment Changes statistics. Tomorrow the official Non Farm numbers will come from the States and this will continue to give additional insight into the U.S. economy which has been setting off alarm bells too. The USD has not gained on the EUR in any type of strong manner because the Federal Reserve is perceived to be creating cheap money of its own. Although quantitative easing has come to an end it does not mean the Fed will do anything relatively new and is likely to remain dovish until it is forced to do otherwise.

Gold climbed yesterday as risk adverse trading increased and is around 1533.00 as of this morning. Commodity prices on a whole however were mixed to lower among Crude Oil and Grains. The AUD did stay stable and is within its higher values. The JPY was consolidated.

Today’s ECB meeting will have all investors focus. The rate increase is expected. It is ECB President Trichet’s press conference this afternoon that will the chance for volatility in the markets. Combined with tomorrow’s Jobless numbers from the States the possibility of strong one two punch for traders definitely exist. Opportunities will abound in the Forex and Commodity markets, but proper risk management will have to be used to counter what could become fast markets.

Written by bforex.com