[LFX]

A year to the day after the ECB began to lower rates from 4.25%, there is no indication that rate hikes are imminent. But at today's ECB meeting, attention will focus on the tone of Governor Trichet's statement for any hints on how soon liquidity measures will be withdrawn. After the 3 September meeting, Trichet said that ”price developments are expected to remain subdued over the policy-relevant horizon” and pointed to “low inflationary pressure over the medium term, as money and credit expansion continues to decelerate”. These comments were broadly unchanged from the August meeting. Inflation has stayed negative, but is set to turn positive in coming months due to base effects. Trichet will likely refer to this, but on the medium-term outlook for inflation and credit expansion, the key phrases are likely to be retained.

On the economy, last month's statement said that “there are increasing signs of stabilization in economic activity” and that “a very gradual recovery” is expected were less bearish than in July, and market expects the more positive tone to continue today. But Trichet is likely to echo his comments to the European Parliament 10 days ago that there remains a high degree of uncertainty on the outlook, with risks broadly balanced. A more hawkish tone than market anticipates at today's press conference would signal that the ECB is preparing to start withdrawing excess liquidity. But an official rate hike is still at least 12 months away.

From an FX market perspective, Trichet's statement will be scrutinised for any hawkish comments, which should provide further support for EUR-USD. Fundamentally, remain EUR-USD bulls on the cyclical recovery, as the US dollar (USD) is increasingly used as a funding currency. Technically, short-term momentum indicators remain bullish, with the next key resistance level coming in around 1.5164, the 76.4% Fibonacci retracement of the down-move from 1.2330 to 1.6038.