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Jean-Claude will make his final rate decision after 8 years as the president of the ECB, and he may be forced to reverse recent policy and cut the rates. The decision is only a warm up before the bigger show – the press conference, and this time it is of higher importance, given the extraordinary events that we have seen lately.

Here is a preview for this all-important event, with possible outcomes for the euro.

Background

In the last rate decision, Trichet left the interest rate unchanged, as expected, at 1.50%. The big news came at the press conference, where Trichet and the ECB finally acknowledged the slowdown. Inflation expectations were downgraded to “balanced” and growth expectations were downgraded to having “downside risks”.

Trichet refused to talk about future rate moves but did provide a show when a German reporter managed to aggravate him. A show is guaranteed now as well.

Since then, more signs of slowdown have been seen: investor confidence, purchasing managers’ indices, retail sales, and consumer spending have disappointed, among others. The debt crisis worsened as well, with Greece and the troika unable to agree on the next trance of aid.

The European banking system is beginning to admit the pressure, even after Trichet coordinated on providing dollar liquidity with 4 other central banks.

No 0.50% Cut

Earlier, there was speculation of a complete reverse in policy – a 50 bp cut that will erase the hikes of April and July. This has been fiercely denied by ECB officials.

In addition, the initial inflation estimate for September has shown a jump to a pace of 3%. This surprising rise leans heavily on price rises in Italy and may be downgraded in the final edition.

Nevertheless, the ECB doesn’t move quickly and has very low probability. In such a case, this will show that Trichet is admitting the severity of the situation, and the euro will plunge, no matter what he says in the presser.

0.25% Cut on the Cards

A reverse of the latest hike in July has significant chances. Trichet reacted in the same way and in the same pace exactly three years ago: raising the rate just before Lehman collapsed and reversing policy immediately after the crash.

Trichet might not want to leave the task of cutting the rates to his successor, Italy’s Mario Draghi. Draghi will not want to have a weak image, especially as an Italian (known for more loose monetary policy).

While supporting growth is not the “single needle in the ECB’s compass” as Trichet says, but rather inflation, there are enough signs, such as falling oil prices and low core inflation, that could justify a cut now.

This is partially priced in. Such a scenario will be slightly euro bearish, but the bigger moves will probably await the conference: updated forecasts, concern or confidence about the debt crisis and perhaps even a hint about the ECB’s direction will rock the euro. Every word will count. If Trichet is firm, the euro could recover from recent blows. If Trichet acknowledges reality, there’s more room for falls.

No rate move?  

Given the inflation and the hate of haste, this scenario is also on the cards, although lower than the 0.25% scenario. Trichet’s single needle of inflation can initially push the euro higher, but yet again, everything can change in the press conference.

It’s important to remember that the euro sometimes plunged after rate hikes, when Trichet’s words were pessimistic.

But if he finds some optimism, the markets may leverage this for some correction or profit taking. The euro has lost a lot in value and it could cling, even if temporarily, to some hope.

For technical levels and events, see the euro dollar forecast.

Stay tuned for a live blog of this important press conference.