ECB Remains Hawkish, but Euro Sells Off: What Gives?

The European Central Bank left interest rates unchanged at 3.75 percent and indicated that “strong vigilance” was needed. This is their way of telling the market to expect a rate hike in June.

The prospect of 4.00 percent rates last month should have been positive for the Euro, yet the currency sold off significantly against the dollar, befuddling traders in the process. Unfortunately, doing exactly what the market expected was probably the worst possible outcome. Four percent money has long been priced into the market. What traders were really looking for was a hint of further rate hikes in the months to come. When faced with this question, Trichet said point blank that he won’t comment on what they will do after June. The central bank clearly wants to wait for another month of economic data before deciding whether to bring interest rates up to 4.25 percent. At this point, Trichet’s tone is clearly leaning towards more hikes, but at the same time he may not choose to raise rates if there is more evidence that the prior strength of the Euro is hurting the economy.