Trichet joined the Swiss National Bank and the Bank of Japan of pumping more money into the banking system, by providing 6-month loans in a newly announced liquidity operation. That is an admission that monetary policy needs to help stimulate an economy that has started to see a "deceleration in the pace of economic growth".

The ECB is re-instituting allotting long-term funding to the banking system at unlimited amounts, and that is a loosening of monetary policy and has caused the EUR to be sold during Trichet's question and answer.

Trichet said that the interest rate increases that the ECB has already taken were necessary and said that the Governing Council continues to "monitor very closely" the upside risks to inflation, implying that there will be no interest rate hike in September and leaves the door open for one in October.

Uncertainty remains "particularly high" and that "downside risks have intensified".

While the ECB is holding out the possibility of more rate hikes in 2 months time, the statement acknowledges the problems in the Euro-zone sovereign debt crisis and the slowing economy.

The EUR/USD extended declines from overnight, falling to 1.4150 in the first 20 minutes of Trichet's conference moving close to the lows we had this week, but then rebounding from that level back to 1.4220.

Prior to Trichet, stocks in Europe were lower, and Italian bonds were sold, with Italy's 10-year yield remaining above 6%. Italian bank shares were lower as investors continue to fret that the European rescue facility is inadequate to deal with contagion to Italy and Spain.

One key question was whether the ECB was reactivating its bond-purchase program (S&P) but Trichet said that we should wait to see what the ECB does with that in its weekly release of the figures behind ECB purchases. Trichet also said that he never said that the bond buying program was dormant and that it is an ongoing program and it was confirmed during the conference that the ECB was in the markets buying bonds, yet another step taken by the ECB to help alleviate market pressures.

Nick Nasad
Chief Market Analyst