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Apparently ECB President Jean-Claude Trichet was not swayed by Wednesday's reports indicating a slowdown in Euro Zone economic activity, instead choosing to remain hawkish by making comments that indicate that the ECB is not likely to lower interest rates soon.

Trichet believes that inflation will remain at an elevated level "for a rather protracted period."

By leaving interest rates unchanged without even a hint of a possible rate reduction in the future, the ECB erased some of the Dollars gains from Wednesday.

The move by the ECB also draws a line in the sand between the Fed and the ECB as comments from a Fed official on late Tuesday signaled the possibility of a Fed rate increase late in the year if U.S. inflation appears to be out of control.

Trichet made no direct comment on the report earlier in the week showing that retail sales declined 1.6 percent in March from a year earlier. Instead, he made general statements regarding the economy including:

"The economic fundamentals of the Euro area are sound, with moderate but ongoing GDP growth."

Trichet also made a comment which seemed to be directed toward the global subprime mortgage problem by stating, " however, the level of uncertainty resulting from the turmoil remains unusually high."

Despite Trichet's hawkish comments, two scenarios appear to be developing, both of which indicate the Euro may see downside pressure.

The ECB may ease to stimulate growth. This action may tighten the interest rate differential, which could trigger selling pressure. Secondly, inflation from higher energy and food prices could cripple the Euro Zone economy. Higher inflation could trigger an economic slow down which would also weaken the Euro.

At this time the assumption that the Fed would cease its policy of interest rate cutting is the driving force in the market. It looks as if traders are content with pushing the Euro sideways to lower until the next Fed meeting on June 25. This gives the Fed plenty of time to assess new economic data in order to judge the soundness of the U.S. economy.

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