eur fundamentals

Euro Holds Its Own As ECB Signals Rate Cut Is a One-and-Done Deal

Wednesday, 08 October 2008 23:12:20 GMT  |  Terri Belkas, Currency Strategist

The European Central Bank (ECB) is one of the most hawkish and stubborn monetary policy makers, as they went on the hike rates right up until July as credit conditions worsened and left rates unchanged at their meeting last week.

However, in an effort to show solidarity with the likes of the Federal Reserve and Bank of England, the ECB set their primary mandate of price stability aside for a day to slash rates by 50bps to 3.75 percent. However, unlike the central banks of the US and UK, the ECB’s subsequent press release had very little substance, as they simply said that “upside inflation risks” had decreased, but jumped right back into hawk mode when they said that by keeping inflation expectations in check and “securing price stability” would be supportive of economic growth and financial stability. That may not have been what European banks and businesses wanted to hear in light of the credit crisis, but it did help to support EUR/USD throughout the day. Nevertheless, Credit Suisse overnight index swaps are pricing in over 125bps worth of cuts by the ECB over the next 12 months, which leaves the odds in favor of further declines in the euro in the long term.


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