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Jean-Claude Trichet will meet the press once again. He is likely to appear after the announcement of a rate hike, and the markets will focus on his words at the press conference. What will Trichet hint about the next moves? How will the euro react? ECB Preview.

Hiking the rates to 1.50%

In the previous press conference, Trichet used the code words “strong vigilance” to hint that a rate hike is coming now. This was repeated by the president of the ECB as well as by other officials quite a few times.

Inflation has been marginally weaker than expected: headline CPI has steadied at a pace of 2.7% and didn’t rise. PPI dropped by 0.2%, a little more than expected. This isn’t enough to stop the rate hike.

The new rate will be released at 11:45 GMT. So, the ECB will most probably announce that the Minimum Bid Rate will rise from 1.25% to 1.50%. If there is no hike, the euro will dive, but this is quite unlikely.

Weak Chance of Strong Vigilance

Apart from the stall in prices, there are also signs of slowdown in Europe’s powerhouse: Germany. The US, China and Japan are at a lower gear now, so this is no surprise. In addition, Germany cannot push the euro-zone forward and continue growing fast for a long time.

The ECB is sometimes blamed, rightfully or not, that it leans towards Germany. Even if this is true, Germany is till impacted by the debt crisis in Europe, which got a relief after the Greek vote, but is far from over.

Trichet is also worried by the high exchange rate of the euro, and urges a “strong dollar” policy from the US. He might repeat that once again.

In any case, with less growth and less inflation, there are low chances that Trichet will use the code words “strong vigilance” to indicate another rate hike in August. If he does surprise and use these words, the euro will jump.

How close are they monitoring?

Very closely: An option with higher probability is “monitoring very closely”. These words mean that a rate hike is possible in two months. Trichet used these words in April as expected (after the hike), but didn’t escalate to “strong vigilance” in May, disappointing the euro, commodities and stocks.

So, this option has a high chance, and indicates a rate hike in September or October. In such a case, the euro is likely to shake but not make immediate big moves. The next moves will depend on what else Trichet says and by other news flows.

Only closely: The third likely option is omitting the word “very”. By saying “monitoring closely”, Trichet lengthens the prospect of a rate hike at least until October.

In November, Mario Draghi will replace Trichet, so it will leave the market with uncertainty about future hikes until the end of the year.  In such a case, the euro will fall.

Other words to note

Trichet will definitely be asked about the debt crisis and especially about the private sector contribution. He is likely to repeat the stance of accepting only “voluntary” rollover of bonds. The big question, which reporters are unlikely to miss, will be: “What will the ECB if the rating agencies put Greece in Selective Default?”

The ECB has billions of Greek bonds. What will it do with them?

The press conference, which usually lasts for an about an hour, provides high volatility. Stay tuned for the live blog here on Forex Crunch, reporting and analyzing Trichet.

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