Source: ForexYard

Today’s speech delivered by the European Central Bank (ECB) President Jean-Claude Trichet was a reminder to many that Europe still faces hardship, regardless of the progress which has already been made. The speech was part of a full-day conference in Madrid, Spain, titled Reform of the Financial System.

Trichet’s remarks served primarily as a warning not to become complacent with recent growth figures and estimates. He stated that many were returning to a business-as-usual mentality given the recent confirmations of stable economic recovery. Trichet argued that reforming the European financial system was necessary to ensure against a repeat of the weakness experienced in 2007/08, which is still ongoing.

Many analysts have taken his remarks as a warning that further weakness is ahead and that the current reform process, which he noted was only half done, has still not resolved the issue of economic fragility throughout the region. Policymakers across the euro zone have been able to work together to bring the financial system under review and make necessary changes, but much more work lies ahead, according to Trichet.

He pointed a finger at Greece by remarking on her continued debt woes and fragile system. But he highlighted the plan which Greece had devised for herself and urged its leaders to stick to that plan and continue implementing these reforms.

All in all, Trichet’s speech was taken as optimistically cautious. His remarks were positive, though he appeared reluctant to express hubris at the progress already made. Trichet’s speech, delivered in English, was filled with hawkish statements which so far appear to have supported the EUR going into next week’s trading. But long-term growth for the euro zone, he argued, would depend on Europe’s willingness to finish what it started regarding these financial reforms.

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• Expects trend of tighter monetary policy to continue
• Impossible to calculate irrational steps like Greece leaving the euro or restructuring its debt

• Policy is for region as a whole

Liikanen tells German newspaper FAZ that that the ECB will prevent second-round inflation effects (wage hikes tied to inflation) . A Greek debt restructuring would not help fundamental economic problems, he says.

Inflation pressures in emerging economies is impacting the eurozone, complicating monetary policy, Liikanen says.

• Hikes can be normalized more gradually by moving early
• If ECB waits longer it would risk steeper rate hikes
• Japanese quake will cut Japanese imports, raise public spending

EUR/USD is trading just above 1.4000 as Bini-Smaghi drives home the idea of rate multiple rate hikes to come.

• Rates must adapt to new inflationary pressure
• Debate on aid mechanism must end, must take action

EUR/USD is triggering stops above the 1.3850 level, trading as high as 1.3858 so far.

• Region faces extreme uncertainty on government decisions; waiting for decisions
• EFSF should increase flexibility

• ECB must reaffirm commitment to price stability
• Periphery nations must do away with wage indexing
• Risks to having months of excess inflation

• Central banks should stick to money markets in normal times (leave bond markets alone)
• Should use unconventional measures in times of both boon and bust.