With the BoE expected to keep policy on hold, the key focus this morning is clearly on the ECB. The market expects an unchanged rate decision. However, it’s the press conference that will gauge the markets reaction. The bias is towards a hawkish stance.

Investors expect Trichet to signal a July rate hike by using the ‘strong vigilance’ language. Dealers have already priced in a 25bp hike next month. Even with a tightening bias, the market does not anticipate the ECB to take steps to reduce liquidity assistance to the peripheral banking systems. The Central Bank will also be releasing updated forecasts for the Euro-zone where markets can expect growth and inflation forecasts to be revised higher. However, do not expect Trichet to communicate anything more beyond July.

The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ session.

Keyword phrase of the day “strong vigilance”