Euro, British Pound Encounter Major Event Risk Ahead of Fed, ECB, and BoE Triple Threat

ECB Part 1 - Awaiting 4.00%
ECB Part 2 - Will Sarkozy Attempt to Sabotage the Euro?
BoE - All Bets On A Hike, But Will It Be To 5.50%?

Yield Spread Analysis 05/01 - 05/08
The yield curve in the US was the only one to invert further this past week, as the spread widened 2.6 basis points as signs of continued inflation pressures kept short-term rates propped higher while disappointing NFP?s darkened the employment outlook. Nearly everywhere else, yields gained steadily as the Swiss curve steepened sharply as the Swiss National Bank continued to express their desire to normalize rates further - despite tepid inflation. In Europe, mounting BoE and ECB hike expectations helped to flatten their regions curves.
Looking forward, the FOMC is predicted to leave rates at 5.25 percent on May 9th, but a bias shift in the policy statement could send bonds reeling. However, Thursday May 10th represents an even bigger day, as a surprise hike by the BoE could drive British rates even higher. However, should the central bank signal that they will hold their benchmark steady thereafter, longer term yields could be threatened. Meanwhile, FX and bond traders alike will surely be looking for ECB President Trichet?s return to the phrase “strong vigilance.”

ECB Part 1 - Awaiting 4.00%
Markets will not only be focused on Thursday?s European Central Bank meeting - when the Bank is anticipated to leave rates steady - but ECB President Trichet?s subsequent commentary as well, as the return of the key phrase “strong vigilance” will signal a hike in June:

Jean-Claude Trichet, European Central Bank President
“We are in an episode of the global economy which is extremely encouraging. But there is no time for complacency. The continuing preservation of price stability is certainly a permanent precondition for having continuous and sustainable global growth.” - May 7, 2007

Guy Quaden, European Central Bank Governing Council Member
“The data concerning economic activity have been very encouraging, and it seems economic growth in the Euro zone is still robust.” - May 3, 2007

Klaus Liebscher, European Central Bank Governing Council Member
“The council of the European Central Bank is first of all committed to price stability – its vigilance ensures that we retain our purchasing power and that the euro remains a stable currency.” - May 2, 2007
“I think there is a clear signal for upward price pressures over the medium term, probably materializing perhaps next year stronger than this year because some of the effects won’t show the direct effects this year but probably next year. So all in all, I have no reason to be relaxed.” - May 1, 2007

ECB Part 2 - Will Sarkozy Attempt to Sabotage the Euro?
It?s no secret that French leaders, especially new President-elect Nicholas Sarkozy, believe the Euro to be overvalued. Will Mr. Sarkozy go so far as to challenge the independence of the European Central Bank?

Jean-Claude Trichet, European Central Bank President
“The ECB has noted with great attention that the new president of France has not called for a change in the treaty of the EMU, of the ECB. That has been noted by all observers with satisfaction.” - May 7, 2007

Jose Manuel Barroso, European Commission President
“I fully trust Nicolas Sarkozy… to be a driving force in solving institutional (issues) and on the consolidation of political Europe. France matters for Europe, there cannot be a strong Europe without a European France.” - May 7, 2007

Thierry Breton, French Finance Minister
“Mr. Steinbrueck, as president of the Eurogroup today, will give our common view as we express ourselves with only one voice on exchange issues. But we spoke about it for quite a long time. We discussed, of course, the problem of the situation of the Euro.” - May 7, 2007

Wouter Bos, Dutch Finance Minister
“We just want forex rates to reflect underlying economic fundamentals?That is what we say about every economy.” Regarding French president-elect Nicolas Sarkozy’s future relations with the ECB, he notes: “He may increase the pressure but it is not a good idea.” - May 7, 2007

Peer Steinbrueck, German Finance Minister
“The independence of the ECB is an important part of its reputation and trustworthiness. We should not call that into question.” - May 7, 2007

BoE - All Bets On A Hike, But Will It Be To 5.50%?
A rate hike by the Bank of England is virtually guaranteed this week, but with inflation above the critical 3.0 percent level, will the bank go 50 basis points higher or ease into it with a 25 basis point hike?

Mervyn King, Bank of England Governor
“The crucial achievement of the MPC is to have anchored inflation expectations. But as the saying goes, we are only as good our last meeting.” - May 3, 2007
“The bank is clearly not doing enough of it now - which is to give people this feel for how we are likely to react to data?It will require quite a lot of hard work on our part in thinking it through, but I think we should do it.” However, he insists that the BOE will not “do monetary policy by code word.” - May 3, 2007

Meanwhile, a change in UK leadership looms on the horizon, and Chancellor of the Exchequer Gordon Brown - credited with handing the Bank of England its independence in 1997 - is widely expected to take over the post:

Tony Blair, British Prime Minister
“In all probability a Scot will become prime minister of the United Kingdom, someone who has built our economy into one of the strongest in the world, and who, as I have said many times before, would make a great prime minister for Britain.” - May 1, 2007