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Euro Likely to Remain Under Pressure as Data Points Toward Aggressive ECB Rate Cuts

Tuesday, 11 November 2008 22:09:15 GMT  |  Terri Belkas, Currency Strategist

The euro fell sharply at the start of the US trading session thanks following the release of less-than-impressive data out of the Euro-zone

The euro fell sharply at the start of the US trading session thanks following the release of less-than-impressive data out of the Euro-zone. Furthermore, a sharp drop in US stocks signaled persistent risk aversion in the markets, which typically benefits only low-yielders like the US dollar and Japanese yen. European economic data was mixed, but generally remained supportive of expectations that the European Central Bank would continue to cut rates aggressively through year-end and 2009. In fact, Credit Suisse overnight index swaps are fully pricing in a 25 basis point by the ECB during their next meeting on December 4, and are pricing in 94.5 basis points worth of reductions over the next 12 months. Looking at the indicators on hand, the German wholesale price index fell for the third straight month in October, dragging the annual rate to a more than one-year low of 3.6 percent. Given the steady slide in commodity prices since July, global price pressures have eased quite a bit and government inflation statistics, such as the German wholesale price index, have started to reflect this and Friday’s Euro-zone CPI numbers will likely do this as well. Meanwhile, the highly watched German ZEW survey of investor sentiment surprisingly showed a slight improvement in economic expectations, though the index measuring confidence in the current economic situation tumbled to a three-year low of -50.4. The big market-mover of the week for the euro won’t come until Friday, when the above-mentioned CPI report is released, though this may be overshadowed by the first round of Euro-zone Q3 GDP figures. Indeed, GDP is anticipated to contract for the second consecutive quarter, fitting one of the broader definitions of recession and essentially guaranteeing more aggressive rate cuts by the ECB. Thus, these economic reports create significant bearish potential for the euro which leaves the long-term trend very much in play.

Related Article: Euro Falls Despite Relatively Hawkish ECB and US Data - What Gives?

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