The ECB and Jean Claude Trichet, head of the bank, will take center stage Thursday morning. There's a lot of anticipation going into this meeting and it might prove to be actionable for a short-term trade.

Trichet has been talking pretty tough on inflation this year and has said that he would raise rates. The rhetoric isn't entirely surprising; if you've been around the forex long enough, you know that the ECB usually says more than it actually does.

The sole mandate of the ECB is to battle inflation, so again it's not entirely unexpected to hear its governors talk tough on inflation this year with food and energy prices soaring.

But the problem I have with the ECB's tough talk is that it's concurrent to extreme weakness in European markets. For example, Germany's DAX is down by more than 21% YTD; France's CAC is down more than 23% YTD. On average, the European markets are down a lot more than U.S. markets. That tells me the European economies are in trouble.

How in the world can the ECB hike rates in such an environment?

I just don't see how the ECB can hike rates and I sense a lot of other forex traders are reaching the same conclusion. Take a look at the Commitments of Traders (COT) data for the Euro futures contract. It shows that large speculators have, over the last several months, liquidated their huge net long position in favor of a net neutral stance. (Charts appear courtesy of TimingCharts.com.)

EUR/USD Daily Chart and Commitments of Traders (COT) Data

My sense is that the forex market is just waiting for a catalyst to sell the euro. This catalyst might be the ECB backing off its hawkish stance and adopting a neutral bias.

Of course it's a BIG IF, but you might listen for such a shift in policy Thursday morning. The great thing about the ECB is that it holds a press conference after each meeting. The press conference is broadcast through the ECB's web site, so anyone around the world can watch and listen. This makes the ECB's meetings actionable, much more so than the Federal Reserve's meetings.

I strongly encourage you to watch the press conference Thursday morning. You can find it here:

European Central Bank

(Look at the right half of page, where it says: Webcast of ECB press conference on 3 July  2008.)