At its monthly press conference yesterday the ECB indicated that eurozone interest rates will rise at the next policy meeting in early July. As such a move has already been priced in by markets; the confirmation from Trichet had little impact on the euro. Indeed, the currency actually fell back over the course of the press conference as Trichet offered little insight in terms of further rate hikes beyond July. If anything, a slightly softer outlook for growth and unchanged inflation forecasts saw markets pull back in terms of their expectations for additional tightening.

Thus, for now there seems limited scope for fresh euro upside on the back of the higher interest rate story, particularly as markets are once again focusing on Europe’s debt problems and the difficulty of finding a solution for Greece that appeals to all sides. At the press conference yesterday Trichet reiterated the central bank’s firm opposition to any form of debt restructuring. Looking a little defensive just below the $1.45 level this morning, the euro could slip further going into the weekend if the focus, for now, remains on sovereign associated risk. At the same time though, downside should be protected by the relatively weak outlook for the US economy as some pick up in risk aversion overnight.

The euro also slipped back versus the GBP yesterday but moves to the downside are seen as limited (with support at Stg0.88p) given the challenges that the UK economy is facing, including high unemployment, tightening fiscal policy and a very high inflation rate. The Bank of England announced yesterday that it was leaving interest rates on hold at 0.50%, which means that we will have to wait for the release of the minutes in two weeks time for insight on the latest thinking of the MPC.