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And so here we are. A rate decision day for the European Union that could set the continent up for years of pain. The market is predicting that Trichet and the ECB will raise rates by 25bps this afternoon to take the cost of borrowing to 1.25%. While it is obvious that inflation is running above the ECB’s target of 2%, the latest figure was 2.6%, most of this inflation is imported in the form of food and fuel. Wage price inflation has not been increasing in that part of the world and I think therefore a rate hike is not warranted. As with all these things it will be language and tone in the accompanying statement and in Trichet’s post-decision press conference that will matter most. The lack of the word ‘vigilance’ will signal that another rate hike is unlikely while they will also be keen to suggest that this rise is not just a one-off-knee-jerk to the current inflation picture. Either way I like the euro weaker this afternoon.

The meeting comes less than 24hrs after the Portuguese PM Jose Socrates announced on Portuguese TV that his country needed financial assistance. The terms nor the size are not known at the moment and we are unsure whether they intend to apply for a bridging loan to tide over the upcoming bond redemptions and save the full bailout for after the June elections. Whatever they do, it hasn’t affected the euro too much. The market knew this was coming and, as we have been saying, the FX world is all about interest rate differentials. The prospect of the ECB hiking rates is dominating everything at the moment.

It certainly has overshadowed the Bank of England meeting due at 12 noon. All 57 economists surveyed by Bloomberg are expecting rates to be held at 0.5% and this comes as no surprise. The Bank of England will veer on the side of caution and not raise rates at their meetings in April or May as consumer spending, business lending nor the housing market are showing any signs of a robust recovery. That uncertainty over rates is what is keeping GBP so under pressure at the moment and why currencies such as the EUR and USD are strengthening.

If that wasn’t enough then we also have German industrial production at 11am which is expected to show that the manufacturing sector in the European heartland is continuing to make gains. Yesterday’s factory orders were also better than expected.

Latest exchange rates at time of writing