Expected Outcome of the ECB's Monetary Policy Meeting

JB expectations: 4.25%

Market expectations: 4.25%

In favour of +25 bp

• The wording at the last press conference
• Comments from ECB members
• The inflation rate rose to 4% in June

In favour of unchanged interest rates:

• The expression "Strong vigilance" has not been used
• Political pressure against the ECB, particularly from Mediterranean members
• The economy is beginning to show signs of weakness

The ECB likely to raise interest rates

Our economists expect the ECB to raise interest rates by 0.25 percentage point to 4.25%. The ECB has been in focus lately, particularly in connection with the announcement of new euro-zone inflation data. Overall, the members of the ECB's Board of Governors have been hawkish, focusing on the high inflation rate. As late as yesterday (Monday) a very high eurozone inflation number (4%) was announced (the ECB's target is 2%). Moreover, from Mr Trichet's comments to the European Parliament we understand that a hike on 3 July is not intended as the first of a series of hikes, but as a one-off.

"State of heightened alertness"

On earlier occasions, interest rate hikes were heralded by the expression "strong vigilance", whereas "monitor very closely" was used when interest rates were left unchanged at the following meeting. In the latest minutes, the expression "monitor very closely" was used, but so was a crucial expression, "state of heightened alertness". The question now is whether "state of heightened alertness" is a new expression for "strong vigilance" or just an expression of higher uncertainty than usual.

A slightly stronger euro ...

Our main scenario for the short term is that EUR (and DKK) will strengthen thanks to a hawkish message from Mr Trichet. Against USD in particular it will be a case if we are proved right in that the US job report (to be released at 2..30 p,m. (Danish time) comes out at -80,000 (against -60,000 as expected). With regard to the FX markets, Thursday afternoon is beginning to look like a live bomb. Market participants have fully discounted a quarter point hike by the ECB, but if the bank should unexpectedly fail to deliver, many will be caught completely off balance. If interest rates are left unchanged, EUR and DKK will plunge against most currencies. If things pan out as expected, we are buyers of USD at 159-159.50 (467.55-469).

FACTS

Date: 3 July
Interest-rate announcement: 1.45 p.m.
Press conference: 2.30 p.m.

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice. The analysis is for personal use of Jyske Bank's customers and may not be copied.