The European Central Bank left interest rates unchanged at 4 percent and hinted that rates will continue to remain on hold at the August meeting. Trichet did not use the words, “strong vigilance” which has been code for “expect a rate hike at the next meeting” and interestingly enough, he even pointed out that these words hold particular significance.
The central bank clearly does not want to see the EUR/USD at 1.40 and Trichet even went so far as to say that “we are in domain (in regards to exchange rates) where it is very important to be responsible.” As an export dependent economy, a strong currency could eventually reverse the trend of growth. The futures curve is currently pricing in one interest rate by the end of the year. Trichet indicated that he does not want to alter the market?s expectations for further tightening in September or October. The level of overall inflation and oil prices will be extremely important in determining which month the hike will be delivered. Should oil prices skyrocket because of a surprise hurricane or something else to that degree, the ECB may have to act prematurely. They already indicated that even though the August meeting will be held via teleconference, they will not rule out a press briefing or press conference to announce that “strong vigilance” may be needed once again.