Inflation is beginning to percolate across the globe, as tonight's French HICP numbers reported at 2.4% vs. 2% expected, driven by what else? - Higher oil prices. Ex-energy the results were far more muted with prices rising only 0.1% month over month and 1.1% year over year. Nevertheless the creeping costs of crude are clearly of concern to the ECB and tonight's statement by Trichet reflected that worry. He noted that “strong vigilance with regard to upside risks to price stability is warranted” though the head of the ECB also stated that the rates are “still appropriate”.  With EZ inflation now at 2.2%, having crossed the ECB's 2% target for the third month in a row it may just be a matter of time before then central bank is forced to tighten. 

However, European monetary authorities will be reluctant to make a policy change until they are convinced that EZ economy is strong enough to withstand it.  To that end tonight's Italian Industrial Orders were welcome news to euro bulls as they jumped to a 1.3% month over month gain against expectation of only 0.4% rise. The lower euro is helping Italian industry to compete in global markets and should pacify Italian PM Berlusconi from making his periodic complaints about the unfairness of the unified currency.

Despite the mildly bullish backdrop the EUR/USD lost ground tonight dropping once again below the 1.2000 figure. The move was all the more surprising given the fact that today's US Trade Balance data could very well register the biggest monthly deficit on record.  The market may well shrug off the news for now, attributing the gap to the one off effects of higher oil prices. However, if next week the TICS report shows any material weakness in foreign flow of funds into US, dollar bulls will no longer be so cavalier about the glaring US balance sheet problems. 

Boris Schlossberg is a Senior Currency Strategist at FXCM.