Trichet Sends Euro and Interest Rates Sharply Higher

Trichet has stayed true to form and issued relative hawkish signals. Two key points--"strong vigilance" is needed and no reiteration of the mantra that "interest rates are appropriate". He explicitly said that this could mean a rate hike as early as next month, but the ECB does not pre-commit.

The staff forecast for inflation was lifted this year and next year.

The euro has taken out barriers in the $1.3900 and $1.3950 area. The next psychological level is $1.40. European debt instruments have been hammered with the German 2-year yield up 18 bp and the 10 year yield up 9 bp.

Trichet's efforts to temper his comments by saying that it is not meant to signal a tightening cycle and that the market should not look for a big move may be important, but not immediately so.

Lastly, with the risk of an earlier ECB hike, those countries that had been perceived to be ahead of it like Sweden and Norway,have been hit.