ECB fearing strong Euro

Last Friday, China’s central bank raised interest rates for the second time this year, in its war against economic overheating. Citing continued excessive credit and investment growth and a large trade surplus, the People’s Bank of China raised benchmark one-year lending and deposit rates by 27 basis points. The benchmark one-year lending rate was lifted to 6.12% from 5.85% and the one-year deposit rate rose to 2.52% from 2.25%.

With that news, USD/JPY only managed to close marginally lower on Friday. If 115.46 doesn’t hold, expect 115.00 to act as support, the point on the up trendline on the daily chart.

As a recap, last week’s US inflation data came in weaker than expected, and these are expected to weigh on the US dollar for a while, till we see more encouraging data from US or if we see fresh USD bidding from geopolitical tensions. EUR/USD must clear 1.2911 in order to initiate fresh rally to 1.2979.

Meanwhile, ECB’s Weber, in an interview with the German paper Bild, which is to be published Monday, criticised the 3% hike in German VAT, saying that would curtail the purchasing power of households, together with rising energy prices. I suspect that he doesn’t want the Euro to go too much higher when he said that "large shifts" in exchange rates "would further weigh on exports". The euro has risen 10.3% against the US dollar from its late Nov 2005 low of 1.1640 to current level. I don’t think the ECB will like it very much if Euro goes above 1.3000 because a strong Euro will hurt exports, and slow economic recovery.

This week we will see a sparse calendar of US economic indicators, with July reports on new orders for durable goods and new home sales.

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