Jean-Claude Trichet faces his toughest challenge yet as widening economic divergences within the euro-zone continue to put strain on Euro wide monetary policy. The Eurozone is clearly operating at two speeds which makes the required fundamental policy changes extremely difficult to implement.

The threat of sovereign debt contagion with Portugal and Spain still high on the list as potentials for future default on their debt puts significant strain on ECB policy. Trichet faces the challenge of deciding when to stop buying government bonds and when to withdraw the unlimited liquidity that is currently in place for banks in the Eurozone. Trichet must also decide at what point interest rates will go up to curb inflation risks.

Trichet is in his final year as the president of the ECB and this year will undoubtedly be his greatest challenge yet, today he will chair the ECB meeting where he will be forced to take a defensive strategy to buy time for the Euro, as member governments decide on the best strategy to raise confidence in the monetary union.

The Bank of England also meets today and are expected to keep interest rates on hold. We will not know alot about what is said with regards to policy and the split until the minutes are released in a couple of weeks time. The BoE faces similar challenges to the ECB in that the UK economy has been significantly above its inflation target for 12 months and must at some point raise interest rates to combat inflationary pressures.

The Euro has opened trade today down signalling that yesterdays Portuguese debt auction has done little to quash fears over Eurozone sovereign debt risk. Attention will today turn towards Spain and Italy with their bond auctions.

The key event today will be the ECB press conference where rhetoric and tone will be closely monitored as to the ECB’s stance on Eurozone sovereign risk and liquidity plans for Q1.

If you have a currency requirement and have any questions or queries please don’t hesitate to contact me.

Best Regards
Luke Zorab

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”