However, with inflation soaring and growth indicators weakening, ECB President Jean-Claude Trichet's tone could move fixed income and foreign exchange markets one way or the other, economists say.

"Pivotal to market reaction will be any comments concerning possible future changes in rates," said Søren Dijohn at Danskebank. "However, what the interpretation of the statement and the press conference by the financial markets will be is a tricky matter at the moment."

Dijohn said he does not expect the ECB to make very conclusive remarks on future rates, but rather to repeat that it never pre-commits. "Thus the ECB will leave the door open and not rule out a further hike later this year, depending on the incoming data," he wrote in a client note. "Should Trichet make very conclusive comments (whether it is 'no more hikes' or 'more hikes to come') they would have a considerable market impact."

Although an implied market forecast according to the SONIA curve suggests that a 25bp increase is only 90% priced in, the markets have priced in 75bp worth of increases over the next 12 months.

Russell Jones, head of fixed income at RBC Capital Markets, said the bond markets have priced in too much tightening from the ECB over the next year and that, consequently, a neutral statement would cause at least one of the three hikes priced in to be removed.

"I don't think you're going to see two rate hikes being priced out overnight," he added. "It is tough to know exactly."

Jones added that a "neutral statement" would constitute some acknowledgement that the European economies are growing at sub-potential growth rates. Nevertheless, should Trichet come off as hawkish, one might expect one more rate hike to be priced in, he warned.

Conversely, Ciaran O'Hagan at Société Générale believes that the market is looking for a fairly neutral statement. However, Trichet could be more hawkish than participants would like, O'Hagan said, adding that consequently, further rate hikes could be priced in. "Despite the signs of division on the Governing Council we find it hard to believe Mr. Trichet will be able to firmly announce that it will be 'one and done'," said O'Hagan. The ECB's persistent hawkishness will therefore remain, as will the threat of further rate hikes to come."

From the foreign exchange perspective, strategists advise going long on the euro.

"One thing that we've seen in the wake of last month is an effort to temper expectations of further rate increases," said Steve Malyon at Scotia Capital Markets. "The question is whether Trichet encourages expectations for higher rates or delivers a balanced sort of statement."

However, the combination of recent elevated inflation figures combined with downside risks to the U.S. nonfarm employment report suggests that ongoing hawkishness from the ECB could bring the euro/USD cross to new record highs, he said. "I think you'd want to be long on the euro."

Malyon also said rate hikes could not necessarily be priced out on a neutral statement, though he said one might expect some small sell-off if Trichet delivers a balanced statement. Nevertheless, should that scenario occur, Malyon said he does not expect a material weakening of the euro.

Against the pound sterling, Malyon also recommends buying euros based on the fact that the UK economy continues to show weakness, which is not reflected in its currency.

"Markets generally expect Trichet to be pretty hawkish," said Tom Levinson, foreign exchange strategist at ING. "However, the thing with the ECB is that they will never pre-commit to further tightening at a press conference, so there is a chance of a brief pullback on euro/dollar since he won't confirm more rate hikes."

Nevertheless, Levinson advises buying in that dip since he believes a weaker employment outlook in the United States will inevitably drive the euro to 1.60 against the greenback or further over the next few days.

Payrolls aside, one could see a 20 to 30-pip decline in euro/dollar, but that would be short-lived, Levinson said.

He added it would take a super-hawkish statement from Trichet and a dire payrolls number to bring the euro to 1.60 against the USD on Thursday.

The story should be similar against the pound sterling, Levinson said, suggesting that the euro/sterling should move above 80 cents in the near term and reach 83 or 84 over the next few months.

By Erik Kevin Franco, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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