ECB Rate Hike Likely After Inflation Data Supports Monetary Tightening

After a successfultest of the 1.4000 level, the Euro is once again posting strong gains astraders boost bets that the EuropeanCentral Bank will begin raising interest rates as early as next week.

After a successfultest of the 1.4000 level, the Euro is once again posting strong gains astraders boost bets that the EuropeanCentral Bank will begin raising interest rates as early as next week.

Given the recentnews developments and chart pattern, the current price action suggests thatthis week’s bottoming action and subsequent rally were the result of bothstrong fundamental news and technical formations.

Technically, theEuro found support recently at 1.4020, slightly above the 50%level of the 1.3752 to 1.4248 range at 1.4000. The key, however, to thebottoming formation and subsequent rally has been the two powerful uptrendingGann angles at 1.4088 and 1.4033 today. The Euro is expected to be asstrong as these angles. In other words, look for the uptrend to continue aslong as these angles remain intact. Breaking these angles will be theequivalent of breaking a swing bottom.

Fundamentally, theEuro strengthened overnight against the Greenback as data showed Euro Zoneinflation unexpectedly accelerated in March. This was probably the news the ECBwas looking for to greenlight the start of a tighter monetary policy.

Based on the recentsubdued downside movement in the Euro in reaction to lingering debt issues in Portugal, Spainand Ireland,traders are clearly more concerned about inflation. The overnight price actionsuggests that ECB President Jean-Claude Trichet will likely begin raisinginterest rates at its April 7 meeting.

The news in itselfthat inflation in the 17-nation Euro Zone rose to 2.6 percent in March from 2.4percent in February is likely to be enough to trigger an interest rate hike bythe ECB in April. Furthermore, this increase was the fastest since October 2008and above the central bank’s 2 percent limit for the fourth month.

Now that the marketappears almost certain that an interest rate hike is imminent. Traders havealready begun to factor in whether the ECB will take a “one and done” approach orembark on a series to rate hikes to take full control of the developinginflationary situation. Comments from ECB board members Lorenzo Bini Smaghi andJurgen Stark suggest the latter, adding fuel to a potentially volatile tradingperiod.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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