I don't know how many of my readers are dedicated followers of the day-to-day rhythm of market movements but with an important US unemployment report and a much awaited ECB interest rate decision to think about I imagine that many a trader and broker spent a good part of yesterday holding their breath. In the former case the data confirmed that the US economy is stuck knee deep in stagflation as unemployment held stubbornly at that 5.5% "statistical quirk" while payrolls registered the sixth consecutive month of job losses, shedding 62.000 jobs. If the latest US employment data may have raised an eyebrow here and there, the decision taken by Trichet and his governing council almost certainly will not have (introductory statement here) since the 25 basis point hike was more or less expected by everyone.

As I suggested earlier this week the quarter point increase was never really in doubt, and attention was focused on the extent to which Trichet would use the opportunity of the "pre-announced" increase to lock market expectations in to an expectation of further rate tightening. Personally I was always skeptical about this possibility, and in particular given the numerous off the cuff commentaries emanating from members of the governing council that 4.25% constituted some kind of magic nominal rate to anchor inflation expectations. Yesterday's accompanying statement from Trichet only serves to confirm this view. Trichet and his team have opted for significantly toning down any prospects of future rate increases, at least in the short term. Certainlt this was how most market particpants chose to interpret the contents of the post meeting press conference, and the EUR/USD headed back towards 1.55 rather than upwards towards the 1.60 mark. You can see the longer term evolution of EUR/USD in the figure below where a value of 1.60 would correspond to an index value of 117.2

So many a long EUR/USD punter was handed a rather sharp thump in the lumber region today while their counterparts perched on the other side of the fence got some much awaited relief. At this point it is by no means a sure thing that 1.60 may not return to the table, but if the ECB lays down the whip for now I think such a move is unlikely (which, judging by my earlier attempts to call the EUR/USD this year, probably means that it is very likely).

Trichet in the Sweetspot?

Wait a minute then. Doesn't this mean that Trichet got exactly what he wanted this time around as the EUR/USD dipped alongside a rate hike? This may be the case and while I am a firm believer in not attaching excessive importance on the strength of correlations the chart below does quite neatly sum-up the ECB's present dilemma (as well as does the growing divergence between core and headline inflation as I explain here).

Perhaps I am being a little sloppy in chart construction here - since the dates don't match exactly - but then again, the point I am making is hardly rocket science. It is important to remember here that the increase in headline oil prices is absolute even if of course the appreciation of the Euro itself lowers the relative price. As Macro Man so succinctly pointed out at one point, it is exactly this issue (or the neglience thereof) which makes nominal inflation targeting such a dangerous business.