There is more than a hint of irony that Portugal has been forced to ask for a bailout on the day that the ECB is expected to hike interest rates for the first time in the cycle.

While it can be argued that a 25 bp hike will not make an enormous difference for funding costs in the region, the peripheral crisis does underline the question mark over how high the ECB can push interest rates over the next year or so.

The most pertinent question for today, is not whether the ECB will hike rates (on the assumption that a 25 bp hike is a done deal) but whether Trichet will signal the market is correct to assume that it will keep on hiking at a pace of 25 bps every quarter until next spring.

Anticipation that the ECB was about to hike interest rates was clearly reflected in the strength of the EUR yesterday. There are a number of factors which suggest that the market may have got ahead of itself. Firstly, inflation may moderate.

The ECB's own inflation forecast for next year is 1.7%; which is below its inflation target. Secondly, Trichet indicated last month that an April interest rate hike would not be the start of a process of hikes.

This factor is all the more pertinent given the position that Portugal is in. It is a known fact that the peripheral crisis will continue to play out in Portugal, Ireland and Greece for some time to come. What is uncertain is whether there will be more contagion. This year, the market has become more confident that Spain will escape a crisis.

The Spanish government has made solid progress in implementing budgetary reform. The coming weeks and months will be key in determining whether the market views Spain to be in the clear. The first test will be today's 3 yr Spanish bond auction.

We expect that the ECB will hike interest rates today and then no more than once more this year. If Trichet signals to the market that it may not be prepared to hike rates on a quarterly basis, the EUR could be set for a bout of profit-taking near-term. That said, on the view that the USD will see further weakness this year we continue to target EUR/USD1.50 by year end.

BoE - no change expected

The BoE policy announcement can be expected to pass without much fanfare today. The minutes, which will not be published until April 20, will undoubtedly cause more of a stir. That said sterling may see a modest, short-lived rally into the 12:00 BST announcement as some investors hedge against the risk of a move. On our view that the BoE will not tighten until November in view of the fiscal headwinds facing the economy, sterling is still vulnerable vs. the EUR on a 1 to 3 mth view.

AUD/JPY

The recent rally in AUD/JPY has been far sharper than the coincident increase in the nominal AUD/JPY 2 yr spread (see graph). This strengthens the message that conditions are looking overbought and that there is risk of a bout of profit-taking. That said the BoJ last night underscored its loose policy, stating that it will consider accepting a wider range of financial assets as collateral for funding. This stance suggests that pressure on Japanese rates will continue and that rate differential will continue weighing against the yen medium-term.

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