The ECB meets tomorrow and the market expects Trichet to signal a rate hike next month. In some ways the rate hike is not in spite of the peripheral debt crisis, but because of it.
The ECB, which has come under biting criticism for becoming a holding toxic assets, has to drive home the point, beyond doubt, that it 1) makes a distinction between monetary policy and liquidity provisions and 2) it is independent (makes Bini Smaghi more likely to resist pressure to step down and make room for a French candidate for the ECB board once Trichet retires). Next month's rate hike is nearly fully priced in. That suggests an asymmetrical risk at tomorrow's press conference. The euro faces more downside risks if Trichet fails to provide the word cues then the upside if he provides them.
The ECB, which has come under biting criticism for becoming a holding toxic assets, has to drive home the point, beyond doubt, that it 1) makes a distinction between monetary policy and liquidity provisions and 2) it is independent (makes Bini Smaghi more likely to resist pressure to step down and make room for a French candidate for the ECB board once Trichet retires). Next month's rate hike is nearly fully priced in. That suggests an asymmetrical risk at tomorrow's press conference. The euro faces more downside risks if Trichet fails to provide the word cues then the upside if he provides them.
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