eur fundamentals

Euro Gains Nearly 3% Despite Signs the ECB Will Cut Rates Aggressively This Week

Tuesday, 04 November 2008 20:54:56 GMT  |  Terri Belkas, Currency Strategist

The euro rallied roughly 500 points trough to peak between Monday night and Tuesday afternoon to test 1.30, marking a nearly 3 percent gain. This was a strong move in every sense, but only highlighted how little fundamentals matter right now.

This morning’s release of the Euro-zone producer price index would normally have a bearish impact on the euro, but instead, the currency completely ignored the news. Focusing on the release, the index slipped for the second consecutive month in September which dragged the annual rate of growth to a 4-month low of 7.9 percent from 8.5 percent. The bulk of the decline was due to weaker energy prices, which is in line with the steep drop we’ve seen in oil since late August. As a sign of cooling price pressures, this news suggests that the European Central Bank has room to make monetary policy more accommodative after participating in the October 8 coordinated rate cuts. In fact, according to a Bloomberg News poll of economists, the ECB is anticipated to reduce rates by 50bps to a 2-year low of 3.25 percent. This is similar to what Credit Suisse overnight index swaps are pricing in, though they also signal a small 19 percent chance of an unprecedented 75bp reduction. Looking ahead, EUR/USD may have a tough time breaking above resistance at 1.3027, but a bullish push could target the next level of resistance at 1.3136.

Related Article: Euro's Future Dependent on the Dovish Pace the ECB Sets Next Week

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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