The European Central Bank kept rates unchanged at 1.0% as expected on Thursday morning.  The market was not so interested in the actual interest rate announcement near much as ECB President Jean-Claude Trichet's press conference 45 minutes later.  Since no developed nations are currently in a rate tightening cycle due to deteriorating economic conditions, the market is much more interested with speeches and statements from Central Bank leaders in order to get some insight on future monetary policy actions.

On Thursday morning, Trichet was very sure to emphasize that the ECB has no plans in site to begin a tightening cycle. This was a bit disappointing to the market and caused a very light sell-off of the euro,b but the euro really did not move much on the day at all.  Total movement in the New York trading session was only 53 pips on Thursday.  Before the recent slow-down in the United States, most market analysts were expecting the ECB to begin raising rates by the end of 2010, but that probability is slowly slipping away as the economic conditions worsen in much of the developed world.

Trichet made it clear that he does not believe there will be a double-dip recession in the EuroZone; instead, he is expecting a prolonged period of very slow growth.  His tone is still quite more upbeat and hawkish than Fed Chairman Ben Bernanke, which could mean further euro strength in the near term.  Currently, the economic signals are much too mixed for investors to really commit one way or the other in financial markets.  We are seeing currencies continue to trade in relatively tight ranges as the market waits for the NFP report in order to develop a clearer picture of economic conditions.

This divergence between the ECB and Federal Reserve could weigh on the U.S. Dollar in the near term.  The ECB is moving in the opposite direction of the Fed.  Although the ECB is not in a tightening cycle yet, they are heading toward that direction.  They are looking to move forward.  The Fed, on the other hand, is moving backward.  Mr. Bernanke has been discussing the very real possibility of another round of quantitative easing measures.  Mr. Trichet is clearly against further measures of quantitative easing measures and instead believes Central Banks should begin tightening fiscal measures in order to bring down ballooning deficits.

If the economy continues with very slow growth in the U.S., and a double-dip recession does not begin to develop, then the Dollar may face further weakness versus the euro as investors begin to price in EuroZone monetary tightening.