ECB Delivered Upbeat Economic Outlook

While ECB maintained the main refinancing rate at 1%, the upbeat economic outlook was encouraging. President Trichet said in the statement that there's 'strengthening in economic activity in the second quarter of 2010' while data for the third quarter are 'better than expected'. The central bank continued to view the current key ECB interest rates remain 'appropriate' and 'the risks to the economic outlook are broadly balanced in an environment of uncertainty'.

ECB's bullish outlook on the region's economy boosted market sentiment. At the press conference, Trichet noted that 'Q2 seems to be really exceptional'. This signals that the GDP in 2Q10 may be stronger than Bundesbank's prokection of +1.2% q/q made in June 2010.

For the third quarter, Trichet said 'the available data for the third quarter are better than expected' and 'it is clear that the second half is likely to be less buoyant than Q2 which we expect to be particularly flattering'.

The ECB expects the Eurozone economy to grow at a moderate and still uneven pace, in an environment of uncertainty. The removal of the phrase 'unusually high uncertainty' may indicate the central bank's growing confidence.

Undoubtedly, there were questions on how the central bank will scale back its supply of unlimited cash to banks without affecting the recovery. Trichet declined to comment on this.

Monetary conditions have been firm modestly as Euribor, the lending rate among banks on 3-month loans rose to 0.917% yesterday, the highest level in more than a year. The EONIA has also risen. When asked about opinions on rising lending rates, Trichet regarded these as 'normalization' if the conditions and Committee members have 'absolutely no signaling on interest rates at the moment'. They see it 'operating a little bit better, the volume in the money market has very significantly augmented'. While it is not a normal situation, it is something that is 'certainly in the right direction'.

Recent strong economic development in the Eurozone has been in contrast with disappointing data seen in the US and this is one of the main reasons for euro's strength against the dollar. Although the President did not comment on recent rally in the single currency, the movement should be monitored carefully as exports have been a key factor pushing the region's recovery.