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More Strong Vigilance? ECB Preview

The ECB is expected to leave the interest rate unchanged after the hike last month. The big question is which code words will Jean-Claude Trichet use at the press conference. Here are three factor pushing for a hawkish stance, and three factors pushing for a dovish one. ECB Preview.

After two years, the European Central Bank raised the Minimum Bid Rate last month from 1% to 1.25%. The background was rising inflation. The headline Consumer Price Index had risen above the 2% a few months ago, and continues rising.

The ECB indicated that the rate hike was coming through a very clear communication about this in March. He used the code words “strong vigilance” regarding inflation. This meant that a rate hike was coming. He event took one step further and explained that strong vigilance means that the rate will probably rise.

And after the move, Trichet settled for “closely monitoring” instead of strong vigilance. This statement in April meant that a pause is likely now, in May’s meeting. The interest rate will be announced on Thursday at 11:45 GMT, and the press conference will begin at 12:30 GMT.

What will he say now? Here are the factors supporting a rate hike in the next meeting:

  1. CPI at 2.8%: The initial read for April shows that headline inflation is still on the rise. This rate, fueled by fuel and food, exceeded expectations.
  2. PPI at accelerated speed: The recent final release of producer prices shows that the annual rate is well above 6%. While this figure isn’t closely watched as CPI is, it’s very high and alarming.
  3. German unemployment dropping fast: The number of unemployed people in Germany dropped faster than expected, and the economy is booming. If indeed the ECB leans towards Germany, the Euro-zone’s powerhouse needs to be cooled down.

Here are 3 factors suggesting a pause now:

  1. The Euro: Since the last meeting, the common currency climbed significantly. This makes imports of fuel and food cheaper, and makes German exports less attractive. Is it enough for now? Another hike can send the Euro too high.
  2. Unemployment in the Euro-zone remains elevated: The overall unemployment rate is still high – 9.9%. Growth is slow or even non-existent in some countries. Spain, the continent’s fourth largest country, is struggling to avoid the scenario of bailed out countries, and is struggling with an unemployment rate of 21.3%. Will Trichet look to Spain as well?
  3. Debt crisis: Greece is getting closer to a default every day. They have already asked the EU and the IMF to extend the period of time for returning the funds from the bailout, and current bondholders don’t feel safe at all.

The beginning of the press conference is important in order to hear the code words. But as we’ve seen recently, questions by journalists can trigger interesting comments from Trichet – comments that rock the Euro.

For more on the Euro, including technical analysis and events, see the EUR/USD Forecast.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.