Forex, equities ignore comments

The currency markets virtually ignored Trichet's comments, with the euro rising only 1/10 of a cent against the dollar to $1.4390 in midday Wednesday trading. Europe's major stock markets also took the ECB's comments in stride, with those markets virtually unchanged: London's FTSE gained 3.60 points to 6,282.90, Germany's DAX fell 5.46 points to 7,845.28 and France's CAC fell 3.09 points to 5,506.28 Wednesday afternoon.

Independent currency trader Andrew Resnick told BloggingStocks Wednesday the foreign exchange markets had anticipated, and already factored-in, tough talk by Trichet on European inflation.

"Everyone expected that after the liquidity decision, which is a short-term monetary easing, we'd get a statement from the ECB saying they remain vigilant on inflation, or something like that, and that's what we got. The statement was issued to reassure the price-hawks," Resnick said. "It's the ECB's way of saying they haven't forgotten about inflation and it was pretty much already factored into the markets." Resnick added that he expects 2008 euro-zone inflation of 2.9-3.4%.

A page from the Fed

Further, economist David H. Wang told BloggingStocks Wednesday that Trichet's comments took a page out of the Fed's playbook; a correct tactic, in Wang's interpretation.

The ECB, Wang said, is "matching remedy to concern." On the one hand, Wang said there is concern about liquidity for the next few weeks, due to subprime defaults and typical year-end portfolio maneuvering. The ECB's response: a massive infusion of funds for short-term loans to banks, as needed. On the other hand, Wang added, there is retail inflation and concern among businesses that the euro-zone economy may see inflation inch higher in the months ahead. The ECB's response: Trichet's statement on inflation vigilance and signal that there's no imminent plan to cut interest rates further.

"It was a classic wholesale / retail two-step, which we see all the time from the Fed, and this time it was welcomed from across the Atlantic," Wang said. "The ECB let everyone know that they're watching both wholesale and retail conditions."

Watching inflation

Wang said the ECB ultimately may have a tougher battle against inflation than the Fed. While noting that the higher price of oil is pushing up inflation on both continents, wage pressures may build quicker in Europe, making the ECB's task that much harder, he said.

"Historically, when inflation appears, Europe, with a stronger union presence, has seen labor press for wage increases quicker than American workers have," Wang said. "The ECB has to remain on guard for the appearance of higher wage increases on top of rising costs, which would be a sign that inflation is rising, and rising inflation would make it harder for the ECB to cut interest rates. But so far, the ECB has done a pretty good job containing inflation."