Euro Extends Gains, Risk Up on ECB Comments and Data

Risk is being bought this morning following not so dovish comments from ECB President Trichet and stronger than expected economic data.

Going into the ECB meeting, traders were worried that the Central Bank President would stress the need for ongoing liquidity measures to support the economy and the risks posed by balance sheet adjustments. However I said in yesterday’s post that no new announcements would be made before the stress test results are released because if the results effectively restore confidence, additional measures by the ECB may not be needed.

Trichet spent most of his press conference talking about the importance of the stress tests which is positive because it implies that they believe the stress tests will yield good results, restoring confidence in the banking sector. The market has been concerned that the terms of the stress tests maybe too lax but based upon Trichet’s tone, he believes that investors will be satisfied by the outcome.

Although the ECB is still providing unlimited liquidity, they are scaling back their bond purchases and keeping the 3 month tender for the time being. Inflation expectations are firmly anchored because even though there are upside risks from things like oil prices, domestic cost developments are contained. Their biggest concern is the financial markets because even though GDP is expected to grow at a moderate and uneven pace, second quarter euro region GDP is likely to be much stronger than the first. The latest euro area data including this morning’s German Industrial Production were very good and these are the type of upside surprises that do not support a double dip recession. Trichet also chastised the market’s sentiment, saying that there is always a tendency for the market to be excessively pessimistic.

A move to 1.30 in EUR/USD may hinge upon the results of the stress tests, but Trichet’s encouraging words should provide support for the currency.

Meanwhile, very strong Australian employment numbers and the big drop in jobless claims have helped to spark risk appetite in the forex market. The improvement in Australian labor market adds pressure on the Reserve Bank of Australia to raise interest rates next month while the drop in weekly and continuing claims in the U.S. provide some relief for the U.S. labor market.

About Kathy Lien 235 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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