eur fundamentals

Euro Consolidates Above 1.27 - Will the European Central Bank (ECB) Cut Rates Next Week?

Friday, 31 October 2008 23:20:47 GMT  |  Terri Belkas, Currency Strategist

After plunging at the start of the European trading session, EUR/USD did little but consolidate above support at 1.2682/90. While the pair may eventually recovery from these levels at the start of next week, one thing is clear: there is still significant bearish potential for the euro.

Economic conditions have deteriorated rapidly throughout the region, with the October PMI readings showing that business activity in the Euro-zone’s manufacturing and services sectors has been contracting for five consecutive months. Furthermore, this morning’s Eurostat estimate of Euro-zone CPI showed that price growth eased to a 3.2 percent pace in October from 3.6 percent. Given European Central Bank President Jean-Claude Trichet’s more bearish stance on the economy and the bank’s participation in the October 8 coordinated rate cuts, the indications of cooler inflation pressures gives the ECB even more room to cut rates. As a result, a Bloomberg News poll of 50 economists shows that the European Central Bank is very likely to cut rates by 50bps to a nearly 2-year low of 3.25 percent on Thursday, November 6, at 7:45 ET. The reaction of the euro, however, may depend more on Mr. Trichet’s post-meeting press conference at 8:30 ET as his speeches tend to be very straightforward and biased. If Mr. Trichet suggests that the ECB will cut rates further, the euro is likely to take a hit but if he signals a more neutral stance going forward, the currency could actually rebound.

Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

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