EUR/USD’s pop to fresh session highs at 1.2848 turned out to be very short-lived. Traders apparently took the shift to the ECB using a floating rather than fixed rates on its three-month liquidity operations as a sign the ECB was laying the ground work for a hike, at some stage. Trichet quickly poured cold water on that idea, saying the move had no message for monetary policy attached.

German banks were among the heavies sellers near the highs, traders report.

We dipped as low as 1.2810 to shakeout weak longs and trade now at 1.2825. 1.2775/1.2850 range-trade prevails for the near-term…

Bundesbank president Weber has made a few controversial remarks in the last few months, essentially pre-announcing today’s move to extend liquidity provisions as well as public opposing ECB bond buying. The press gave Trichet the opportunity to put the Bundesbank chief in his place but Trichet passed on the opportunity…He did say he was appalled by the comments of Bundesbank board member Sarrazin and has full confidence in the Bundesbank’s response to them.

Based on recent data, Trichet says the ECB sees no double-dip recession.

Interestingly, the change in policy on liquidity provision was not unanimous among ECB board members. The decision was taken by consensus, Trichet says.

The ECB has slightly modified the way it provides liquidity support to banks but Trichet insists that the moves in no way signal any future changes in monetary policy.

EUR/USD has eased from 1.2848 session highs and now trades at 1.2832.

Elsewhere, traders report real money demand for USD/JPY, he;ping lift that pair to the 84.30 area.

The spigots remain open at the ECB so that EU banks can maintain their funding base.

Watch the press conference here.

ECB staff has revised upwards its GDP forecast to +1.4/1.8% and to 0.5%/2.3% in 2011.

ECB staff forecasts for inflation were revised higher, the 1.5/1.7% for 2010 and 1.2/2.2% in 2011.

As expected.

• Will decide future steps after talking with Sarrazin

Background on the issue is here.

Anyone want to make book on his odds of survival on the Bundesbank board?

• Recovery on track but growth will be slower than Q2 for Europe.
• Europe bordering on self-sustaining recovery
• Labor market performance in Germany very strong
• Too early to say sovereign debt crisis in Europe behind us, though stabilized
• Refuses comment on monetary policy as in blackout period before September meeting
• Good crisis management does not distort long-term incentives
• Refuses comment on US policy, citing central bankers code to discuss policy in private
• Downplays talk of taking helm of ECB, concerned with working on ongoing German economic challenges

Bundesbank president and erstwhile successor to ECB chief Jean Claude Trichet Axel Weber will be interviewed from Jackson Hole in about 10-minutes.

Weber is not much of a fan of bond-buying, so it will be interesting to listen to his comments as spreads in the euro zone indicate that creditworthiness of Spain, Ireland, Greece and Portugal remain suspect by the market.

EUR/USD is consolidating gains in the 1.2760s. More stops are seen in the 1.2780 region and again toward 1.2830;  Offers are layered up to 1.2800.

For all the wailing and gnashing of teeth about the ECB buying Irish debt last week, the bank bought only EUR 338 mln, taking its total purchases since the spring to EUR 60.5 bln.

The Irish gilt market ain’t all that deep, so the modest cumulative purchases are not that much of a surprise…

The ECB will drain the EUR 60.5 bln in a money market operation tomorrow, as it does every week….

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