Jean-Cluade Trichet used the code words “strong vigilance” to hint a rate hike in July. This was expected. On the other hand, he talked about risks and elevated uncertainty. He dedicates a lot time to the need for fiscal consolidation. The ECB left the rate unchanged at 1.25% as expected. Euro dollar lost support at 1.4580, but temporarily bounced off 1.4520 before going under 1.45 and stabilizing there. These are the events in Trichet’s show.
Wrap up
- Strong vigilance means probable rate hike next time, but no pre-commitment.
- Uncertainty remains high.
- Oil prices expected to drop.
- Governments that have big deficits “weren’t brilliant”.
- Trichet also says about any credit events that “We will say it is an enormous mistake” and that it is up to the governments. It seems that the ECB gives up the fight.
- A repeat of the “strong dollar policy” from the US. This was heard more than once. Trichet gets a lower euro for now.
Background
This is the second pause since the rate hike in April .The pause was widely expected, as Trichet hinted about this in the previous rate decision in May.
He then used the code words “very closely monitoring” to hint another pause, but a hike in July. In that press conference, he talked in detail about the American “strong dollar policy”, and said that the exchange rate of Euro Dollar is a one of the important variables in the decision. 
The pair that then traded above 1.48 fell fast and later dipped below 1.40. It traded at around 1.4620 before the release, between the 1.4580 and 1.4650 lines.
Trichet is now widely expected to use the code words “Strong vigilance” to hint a hike in July and to push the euro higher. In the ECB Preview, I wrote that there is a chance of surprise – another pause. Such an unexpected move will hurt the euro. We’ll soon see.
Live Blog
12:22 All times are GMT. EUR/USD is steady at 1.4616. Conference begins at 12:30.
12:25: The ECB has a single mandate: to keep inflation at 2% or a little below. Recent figures show that inflation is at 2.7% annually. It has already been higher, and Germany has shown some signs of slowdown, but the tendency is towards a move next month.
12:30 Press conference didn’t begin yet. In the meantime, US unemployment claims are at 427K, within expectations, and the trade balance came out better than expected – deficit of 43.7 billion. A number of 48 was expected.
12:33 Trichet begins the press conference. Trichet is optimistic in his opening statement – improving conditions. There are risks. He says: “strong vigilance” – EUR/USD jumps to 1.4650 and bounces at this resistance line – very choppy trading.
12:35 Refinancing operations to continue. EUR/USD now falling to 1.46.
12:38: Growth forecasts revised to the upside for 2011, but unchanged for 2012.
12:40 Inflation is related to commodities.
12:43 Oil prices are expected to fall.
12:45 EUR/USD already down to 1.4545 as Trichet talks about growing uncertainty.
12:47 Banks need capitalization soon.
12:48 Trichet concludes statement and says again that uncertainty remains elevated. Strong vigilance is warranted. “We will do all that is needed against inflation”
12:49 Many countries need to take care of their deficits says Trichet. EUR/USD bounces off lows at 1.4530.
12:50 Trichet dedicates a lot of time to talking about fiscal consolidation of member countries.
12:51 Questions begin: inflation fighting is good for all the countries. Repeats words in previous rate decisions. “It is our primary mandate”
12:53: EUR/USD bounced off the 1.4520 line and now at 1.4540. It lost the 1.4580 line.
12:54: Question: Is this the beginning of rate hike series? Answer: Referring to the code words “strong vigilance”, Trichet says that this a good sign, but that the ECB is not pre-committed.
13:01 Asked about private sector participation in helping Greece, Trichet is very defiant, and says that privatizations are the way to go.
13:07 EUR/USD is at 1.4534, stabilizing above 1.4520 for the time being.
13:10 Asked if a voluntary rollover will be agreed, something that Trichet didn’t rule out, Trichet says that the ECB rejects any credit event. The ECB will not roll over its own Greek bonds.
13:12 Asked about removing non-standard measures, Trichet doesn’t provide a real answer.
13:14 EUR/USD dips below 1.452o as Trichet repeats the quote of Geithner and Bernanke about a strong dollar policy.
13:17 Trichet refuses to comment on the big disagreements with the German finance minister. Reporters don’t give up and EUR/USD falls to 1.4490.
13:20 A reporter quotes Moody’s assessment that no roll over will really be voluntary. Trichet says that governments “were not brilliant” regarding their budgets – blaming them directly. EUR/USD above 1.45 again, but under 1.4520 that turned into resistance. Support is at 1.4450.
13:21 Trichet says that after “meditation”, the risks remains balanced.
13:23 Trichet talks also about job creation and not only about inflation. He says that “we are not pre-committed”.
13:24 Asked again about credit events, Trichet says it is the governments. “We will say it is an enormous mistake”. Is the ECB giving up its fight against restructuring? EUR/USD falls.
13:26 Asked about Ireland, Trichet refuses to answer any of the questions. EUR/USD continues lower.
13:29 Asked about Obama’s urge to solve the Greek crisis, Trichet prefers agreeing with Obama on the “Strong dollar policy”. There are global problems..
13:30 The Euro area as a whole is OK. He says that the debt ratio is better in Europe than in the US and in Japan. EUR/USD bounces to 1.4490.
13:34 Asked about contagion in case of a Greek restructuring, Trichet says that “we are not working for our own interest” but for all economies. The assumption is that the “wrong decision” won’t be made.
13:35 No pre-committing on the next decision, yet again. Regarding the US, the assumption is that there will be no mini-default in the US.
13:39 Asked about the important meeting on June 20th, Trichet says that the executive authorities to make a good decision. EUR/USD is stabilizing at 1.4490.
13:41 Mario Draghi is a great candidate – an official candidate. Trichet says that he already signed the papers regarding the appointment of Draghi.
13:44 Asked if the program for Ireland is working, Trichet says that it depends on Ireland.
13:45 Press conference ended. EUR/USD at 1.45. Wrap up coming soon.
For more about EUR/USD, see the euro to dollar forecast.
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