For the first time since 2007, the European Central Bank raised interest rates by 25bp to 4.25 percent. However despite this move, the Euro dropped more than 200 pips when ECB President Trichet failed to signal to the markets that interest rates would be increased again this year.
Going into the ECB meeting, the Euro rose to a high of 1.5910, indicating that currency traders were clearly banking on hawkish comments. Instead, Trichet played down the prospect of more rate hikes by saying he has “no bias” more than 5 times in the question and answer session with reporters. For Euro bulls, having no bias is just as bad as not having raised interest rates today. Despite strong retail sales, a sharp drop in the German unemployment rate and much stronger than expected producer prices, the ECB was surprisingly neutral. For a staunch inflation fighter, it is quite uncharacteristic to have no bias especially on a day when oil prices hit a new record high. German factory orders are due for release tomorrow. A strong rebound is expected but that may not have much of an impact on the Euro. We expect a bit more weakness before some stabilization in the EUR/USD.