Yves Mersh, Luxembourg's representative on the governing council of the European Central Bank (ECB), recently took an extremely hawkish view of central bank policy.
Mersh told the Financial Times' German edition that inflation would stay above 3 percent through the fall, warning that the bank would have to revise its target upward and would likely miss its 2 percent goal.
He suggested that a rate increase was in the cards and, most tellingly, hinted that the ECB now fears that slowing growth alone isn't enough to stop inflation. He discounted completely the idea of rate cuts.
On a purely technical, rather than fundamental, level, we could see a significant sell-off above EUR/USD 1.60, followed by lower prices for weeks, possibly months. Be ready to sell if you believe in technical analysis!
If this occurs, any move below the 1.5600 zone would indicate that a firm technical top has been established.
That said, later comments by two members of the ECB Governing Council were hardly surprising, given the ECB's unrelenting, hawkish stance on inflation.
Indeed, according to Banque de France Governor Christian Noyer, the ECB is resolute in its determination to return inflation to below 2 percent in 2009.
"Our big problem is to ensure that inflation returns below 2 percent next year," Noyer said in a radio interview this week. "We will do whatever is necessary for that. If needed, we will move interest rates."
In my experience, this is about as clear a statement as you can get from a central banker. Noyer is preparing the market for a rate increase.
Meanwhile, the Italian press reported that Greek bank governor Nicholas Garganas has expressed concern. So that makes a formidable number of governors so far — Germany, France, Luxembourg, Austria, Greece, and Cyprus — who have expressed concerned about inflation.
All this raises the question of why the ECB has not already raised its key interest rate this year. Presumably, financial sector turbulence have played a significant role in staying the central bank's hand.
It is possible that the members of the ECB council (who are, after all, bankers!) have in fact been fairly content with the euro's ascent to all time highs against the USD and the British pound.
Indeed, ECB President Jean-Claude Trichet has publicly acknowledged the currency's role in tempering the inflated USD price of energy imports, a particularly pertinent issue right now given new all-time highs in the oil price.
Despite occasional warnings about "excesses," the ECB seems indeed fairly relaxed on the currency front, despite the fact that such a posture potentially places the ECB (again, the bankers) at loggerheads with the Eurogroup of Finance Ministers (who are, of course, politicians).
In contrast to the U.S., however, Europe's central bankers seem indeed to have the final decision power on interest-rate policy.
I take this opportunity to reiterate my preference in today's environment for the Norwegian kroner, which has posted among the largest increases against the dollar this month, given the currency's close relationship with the price of oil — an 81 percent correlation between the two on a weekly basis since 2000.
Today, I would cash in my profits from my euros and convert them into Norwegian kroner and Chinese yuan, which still has a very, very long way to go up.
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