The Keyword Of Today's Imminent ECB Rate Decision Conference: "Strong Vigilance"

The key news today is not out of the US, but out of Europe, where the ECB will shortly announce that it will hold its main refinanincing rate flat at 1.25% (in line with the BOE's just announced "unchanged" decision, keeping rates flat at 0.5%), though what everyone will focus on is what will be said in the news conference following the decision, where the key phrase is "Strong Vigilance", whose utterance will send the EURUSD much higher on expectations for another 0.25% hike in July. It will also mean that inflation in the Eurozone continues to run up and is still largely out of control, as stagflation threatens not only the UK, but the core of Europe as well. From Reuters: "The ECB is expected to use higher staff inflation forecasts, to be published during Thursday's post-policy meeting news conference, as justification for higher interest rates to come -- probably starting with a rise to 1.50 percent next month. The ECB's Governing Council began meeting at 0700 GMT. The bank raised its main refinancing rate to 1.25 percent from 1.0 percent in April, its first tightening in two years. In the post-meeting news conference, ECB President Jean-Claude Trichet is expected to say the bank will exercise "strong vigilance" over price pressures, using a phrase that in the past signalled a hike was a month away. He used that code in March to flag April's rate rise." There is also a very minor chance that the ECB will hike rates today: "Firming cost pressures -- euro zone producer prices rose by more than expected in April -- mean a rate rise cannot be ruled out this month though the ECB's decision not to signal a hike makes it very unlikely. "I don't think the door to a hike in June is completely closed but given that the ECB has historically pre-announced a rate hike, a hike in June would be a surprise and would assume a change in communication strategy," said Nick Matthews at RBS." The problem is that every incremental rate hike simply means that the interlocked PIIGS markets will be further locked out of markets, as short term funding rates continue rising ever higher: the irony, stated simply, is that by fighting inflation for the healthy countries, the ECB is making the unhealthy ones even worse.

Lastly, and perhaps most importantly, will be following the simmering conflict between the ECB and Germany. More from Bloomberg:

European Central Bank President Jean- Claude Trichet may today play the interest-rate card and signal to European governments that the euro region’s debt crisis is theirs to solve.
Two days after German Finance Minister Wolfgang Schaeuble opened a rift with the ECB over how to fix Greece’s debt crisis, Trichet is likely to signal that the ECB is ready to raise interest rates for a second time in three months in July, a Bloomberg News survey showed. The central bank today will keep its benchmark at 1.25 percent, a separate survey showed.
The latest phase of the Greek crisis risks exacerbating tensions between the ECB and the German government. While Schaeuble said in a letter published June 7 that bondholders should be stung as part of a second Greek bailout package, the ECB argues that such a step could spark a new wave of financial turmoil and insists it’s ready to press on with raising rates.
“If there’s a hardening of attitudes between Germany and the ECB, the ECB are just going to dig in their heels and insist on their independence,” said James Nixon, chief European economist at Societe Generale SA in London. “They’re going to tell European governments it’s their problem and they can clear up the mess.”

While Trichet has said the so-called Vienna initiative approach, which would see bondholders commit to purchase new bonds after their existing holdings had matured, was something “the ECB would consider appropriate,” Schaeuble called for a solution going beyond that.
“The ECB is frustrated that there are these irrational politicians that they can’t control,” said Jens Sondergaard, an economist at Nomura International in London. Greece’s “doomsday scenario is that they default, they don’t get the payments and all bets are off.”
A year after approving a 110 billion-euro ($160 billion) bailout for Greece, European leaders and the International Monetary Fund are working on a second funding package. Schaeuble told lawmakers yesterday that Greece’s financing needs total 90 billion euros through 2014, according to two people who attended his briefing.
The EU and the IMF can’t make a pending bailout payment to Greece until a plan to meet the country’s financing needs for 2012 is worked out, according to a report published yesterday. The country’s financing costs remain “prohibitive,” making it impossible for Greece to return to markets next year, it said.

The ECB is “desperate to avoid the debt crisis becoming a euro crisis.” said Steven Barrow, an economist at Standard Bank Plc in London. “The best way to this is prove its independence and raise rates. Do I think this is the best way? No. Do I know the ECB well enough to know that they will do it? Yes.”
ECB policy makers have signaled concern about oil-driven inflation feeding into wage demands and sparking so-called second-round effects. Italy’s Mario Draghi, the nominee to take take over from Trichet, said on May 31 that there’s now a “greater need to proceed with monetary policy normalization.”
Trichet today may pave the way for a rate increase in July by calling for “strong vigilance” on price pressures. The ECB in April raised borrowing costs from a record low for the first time in almost three years to fight inflation threats.
While euro-region inflation weakened to 2.7 percent in May from 2.8 percent in the previous month after energy costs retreated, the central bank will probably increase its full-year estimate to 2.7 percent from 2.3 percent projected in March and also raise its growth estimate, said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.
“Assuming that the Greek problem doesn’t become systemic, the ECB will press on” with raising rates, said Ken Wattret, chief euro-region economist at BNP Paribas SA in London. “Greece is only a risk scenario for the ECB.”

We will bring you the announcement and the conference live, both of which are imminent.