South Dakota Time: Euro Soars on "Vigilant" Trichet, ECB Raised Inflation Projections

Euro soars and is heading towards 1.4 psychological level against dollar after Trichet more than satisfies the market by delivering some hawkish messages. Most importantly, the magical word "vigilance" is mentioned in today's press conference and the word has been used to signal rate hike in the following meetings in the past.

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Trichet said that "strong vigilance is warranted with a view to containing upside risks to price stability." While April hike is certainly not a done deal, the word does suggest that ECB is moving very close to tightening cycle. ECB left rates unchanged at 1.00% today and also updated staff projections. GDP is seen in range of 1.3-2.1% in 2011 and 0.8-2.8% in 2012. HICP inflation is seen to be 2.0-2.6% in 2011 and 1-2.4% in 2012. The inflation projection has shifted upwards "due to the considerable rise in energy and food prices".

Dollar is mildly firmer except versus Euro after upside surprise in job data. Initial claims dropped much more than expected last week to 368k, the lowest level since May 2008 and far better than expectation of 390k. The four week moving average also dropped to 388.5k, lowest since July 2008 and was the first time it's below 400k level since July 2008. Continuing claims decreased by 59k to 3.77m. The data provides some ground for optimism about the job market ahead.

Sterling dipped earlier today after after disappointing economic data. PMI services unexpectedly dropped from 54.5 to 52.6 in February, much weaker than expectation of 54. Hometrack house price also dropped unexpectedly by -0.2% in February. Other data released saw Swiss retail sales dropped -2.6% yoy in January. Eurozone PMI services was revised lower to 56.8 in February, retail sales rose 0.4% mom, 0.7% yoy, Q4 GDP was unrevised at 0.3% qoq, 2.0% yoy. Japan capital spending rose 3.8% in Q4. Australia building approvals dropped sharply by -15.9% mom in January, trade surplus narrowed to AUD 1.88b.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3775; (P) 1.3832 (R1) 1.3922; More.

EUR/USD's rally extends further to as high as 1.3972 in early US session and intraday bias remains on the upside for 61.8% projection of 1.2873 to 1.3860 from 1.3427 at 1.4037. Break there will extend the whole rise from 1.2873 towards 1.4281 key resistance next. On the downside, below 1.3832 minor support will dampen this view and turn bias back to the downside. Nevertheless, near term outlook will remain bullish as long as 1.3427 support holds.

In the bigger picture, main question remains on whether medium term correction from 1.6039 has finished with three waves down to 1.1875. The firm break above 1.35 psychological level again affirm the case that fall from 1.4281 was merely a correction only and whole rise from 1.1875 is still in progress. Also, note that break of 1.4281 will revive the case that medium term correction from 1.6039 was completed with three waves down to 1.1875 and the long term up trend might be resuming. On the downside, though, below 1.2873 will turn focus back to 1.1875 low.

Economic Indicators Update

GMT

Ccy

Events

Actual

Consensus

Revised

23:50

JPY

Capital Spending Q4

3.80%

5.90%

5.00%

00:30

AUD

Building Approvals M/M Jan

-15.90%

-3.10%

8.70%

10.00%

00:30

AUD

Trade Balance (AUD) Jan

1.88B

1.56B

1.98B

2.02B

08:15

CHF

Retail Sales (Real) Y/Y Jan

-2.60%

1.70%

-0.40%

-0.80%