The currency markets continue to await the austerity vote on Greece, but in the meanwhile we did remember why the EUR had been so strong up until the latest act in the Greece saga which erupted at the beginning of May, and that was the fact that the ECB had entered a rate hiking campaign.

ECB President Trichet signaled again today that an interest rate increase is coming in July as he used the term “strong vigilance” in a speech today. As that crossed the newswires the Euro saw a 30-40 pip pop maintaining most of its gains from yesterday’s session when we saw a bit of a relief rally as the market priced in that Greece would likely pass its austerity measures and we had a French proposal for private bondholder involvement that was received positively initially.

From Bloomberg: ““We’re taking the decision progressively to anchor inflation expectations,” Trichet said at a press conference in Amsterdam today following a seminar with central bankers from the Asia-Pacific region. “As far as we’re concerned, we’re in strong vigilance mode.” The euro rose almost half a cent on the comment to $1.4284 and yields on German two-year notes climbed 2 basis points to 1.40 percent.

The ECB raised its benchmark rate in April for the first time in almost three years, lifting it by a quarter point to 1.25 percent. Policy makers next convene in Frankfurt on July 7. Inflation in the 17-nation euro region has been in breach of the ECB’s 2 percent limit since December.

“We are taking the decisions progressively that we judge appropriate to continue to very solidly anchor inflation expectations, which by the way has been the case and is the case at the moment,” Trichet said. That is “extremely important for the stability, the confidence, and the prosperity of Europe,” he said.”

The EUR/USD pair had been rejected for a second time at the 1.4355 area earlier in the session, but it managed to hold above the 38.2% retracement of its upswing yesterday, as well as its 55-ema in the 1-hour timeframe.

In the short term we see that our moving average are converging a sign of consolidation, though we did see a cross of the short-term 21-ema (red) and medium term 55-ema (blue) into a bullish alignment, but both still remain below the longer term 200-ema (gray).

Let’s see if the Trichet comments are enough to help propel the EUR/USD past the selling interest at 1.4350.

Some other important stories crossing the wires include some speculation over the next round of stress tests in Europe. We’ve had some reports that up to 15 EU banks out of 91 may fail the stress test.

From ForexLive: “Eurozone sources  say that up to 15 of the 91 banks in the EU being tested will fail the stress test with likely casualties being Greece, Germany , Portugal and Spain.

The EBA and ECB are pushing for higher numbers  to fail following last year’s seven, to show the seriousness of the examination, but added they did not want to push for more, for fear of sparking panic and intensifying the EU debt crisis.”

This is an interesting development, but one which will be unable to take the spotlight away from the here and now which is Greece. We therefore, continue to wait on the vote on austerity, which with a positive result could help extend the rally in the EUR.

Nick Nasad
Chief Market Analyst
FXTimes

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.