Despite a heartfelt tangent by ECB President Jean-Claude Trichet during yesterday’s ECB press conference investors only came away with a revised euro zone growth projection. A lack of a policy response to the European debt crisis and markets adjusting forecasts for the ECB tightening has the EUR coming under intense selling pressure. Given the EUR price action over the past two days we may assume that next week will continue to see increased volatility for the EUR both versus the USD and in the crosses.
The take away from yesterday’s ECB press conference was the downgrade of euro zone growth and a lack of a policy response to the euro zone debt crisis. The lowering of growth forecasts is having an immediate impact on the EUR as market players adjust their expectations for the ECB rate tightening cycle.
An environment of heightened tensions in the euro zone can be inferred by the comments coming from the Eurocrats this week, in particular, comments to Dow Jones FX Trader from euro zone finance minister Jean-Claude Juncker who referred to the next tranche of aid, “Greece has to know that the disbursement should not be taken for granted–they have to deliver… I have the impression that things are not moving at the right speed–the results are not there.” Greece will be hard pressed to meet its financial requirements as the austerity program is having a negative impact on the Greek economy which contracted -7.3% in Q2 and 8.1% in Q1. Next week the Troika is expected to return to Greece to finish its review Greece’s progress implementing the agreed upon austerity measures in return for the original EUR 110 bn bailout. The risk is for additional volatility surrounding this event. Trichet’s passionate response to a question concerning the working relationship between the ECB and Germany underscores this risk and the tensions surrounding the European debt crisis. Given the price action of the EUR both yesterday and today, it appears the tensions are coming to a head.
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