As expected the ECB kept its benchmark rate at 1% and reiterated its long held stance that it sees risks broadly balanced between inflation and growth. However, at the monthly post announcement press conference ECB President Jean Claude Trichet assumed a decidedly hawkish posture refusing to concede the point that the central bank will become the buyer of last resort for European government debt.
Instead Mr. Trichet praised the fact the fiscal authorities in the region have moved quickly to address their deficit problems and noted that secondary markets have already reacted positively to this change in policy as credit spreads have eased from their panic highs. Mr. Trichet stated that many markets observers were much too pessimistic about Eurozone's ability to deal with the sovereign debt crisis but he remained cautious in his assessment of progress so far.
On the issue of stress tests for the banking sector, Mr. Trichet reiterated his calls for full transparency of the results noting that he believed complete disclosure would boost confidence amongst investors. However he refused to reveal the assumptions behind the test, stating only that every detail will be disclosed on July 23 rd .
Overall, Mr. Trichet's assured manner indicated that at the present time the ECB feels no need to add further monetary stimulus to the system or act as an additional support for sovereign debt problems within the union, leaving that issue to the fiscal authorities in the region. His hawkish message was well received by the currency market and the EUR/USD which had already risen to a two week high on the back of strong labor data out of Australia, continued its climb towards the 1.2700 figure, hitting 1.2695 in early morning New York trade. The surprising improvement in US weekly jobless claims which fell by nearly 20K to 454K was also a boost to risk sentiment this morning and if equity markets can add to their gains from yesterday the risk rally in EUR/USD should continue for the rest of the day with 1.2700 the next target for longs