The European Central Bank raised interest rates by 25bp today, bringing their target rate up to 4.00 percent. This move was widely expected, which explains why the Euro did not react to the rate announcement.
Instead, the volatility came when ECB President Trichet began to speak. Although he said that rates are still accommodative, he made no mention of the words “strongly vigilant.” In yesterday?s [I]Daily Fundamentals, [/I]we pointed out that this is his general mode of operation. Unless the ECB plans on delivering a back to back rate hike, which they have not done since 2000, they always reduce their degree of hawkish. In March 2007 and December 2006, which were the last two times that they raised interest rates, the Euro fell for this reason. No guessing is needed about what happens in June as this shift in rhetoric is a clear indication that rates will remain unchanged. Yet, the retention of the overall hawkish bias still indicates that another rate hike could come in the third or fourth quarter. German factory orders were mixed with the monthly figures dropping more than expected but the annualized figures improving. This suggests that the monthly growth in German industrial production, which is due for release on Friday could fall short of expectations as well. Switzerland has employment figures due for release tomorrow morning. The overall health of the economy should bring the unemployment rate down from 2.9 to 2.8 percent.