From the (London) TimesOnline:
THE European Central Bank struck a defiant stance over the eurozone’s faltering recovery yesterday and insisted that it remains on course to raise interest rates at some point.
After bleak figures showing that the eurozone grew by a meagre 0.2 per cent in the fourth quarter, the ECB bowed to reality and downgraded its forecasts for the bloc’s 2005 expansion.
But Jean-Claude Trichet, the ECB’s President, said there was no discussion of a rate cut at yesterday’s meeting of its Governing Council, suggesting that the worst of the weaker trend in the second half of last year may be over.
“Everybody knows that, at a time, we will have to increase rates,” he said. “The strengthening of domestic demand and, in particular, consumption, may point to the recovery of economic activity.”
The Financial Times provides an explanation.
Economists said the ECB's bias towards a rate increase, despite obvious economic weakness, followed rises at other central banks and concern about strong credit growth and soaring house prices in several eurozone countries.
"The ECB will use any given opportunity to raise rates given the fears over excess liquidity," said Niels-Henrik Sorensen, economist at Danske Bank. Economists do not expect an interest rise for some months.
Not everyone is convinced. From Bloomberg:
"I don't think economic conditions can support a rate hike at this juncture and the ECB at some point are going to have to soften their rhetoric,'' said Steve Pearson, head of currency strategy in London at HBOS Plc.
Thus begins the euro dirge. The aforementioned Mr. Pearson says "The euro is going lower," and
"The euro is probably going to be the loser'' among the three most-traded currencies in the coming few weeks, said Steve Saywell, chief currency strategist at Citigroup Inc. in London. The European currency may drop past $1.30, Saywell said.
But that was probably before they discovered that the good U.S. employment report was actually bad.
(FXSTREET.com has a nice summary of Trichet's press conference.)