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Euro Slumps to 1.40 As Euro-zone Data Signal Recession, Key ECB Rate Decision on Thursday

Wednesday, 01 October 2008 23:48:02 GMT  |  Terri Belkas, Currency Strategist

The euro dropped to support at 1.40 this morning following a morning of news highlighting the recession risks for the Euro-zone’s economies.

Indeed, manufacturing PMI for the region contracted more than initially estimated to 45 while the unemployment rate rose to 7.5 percent, the worst reading since April 2007. By nearly every measure, the Euro-zone is in danger. As a result, Credit Suisse overnight index swaps are pricing in almost 100bps worth of reductions during the next 12 months. So will we see a cut on Thursday morning when the ECB announces their next policy decision? According to a Bloomberg News poll, all of the 58 economists surveyed say no. While there are significant risks to the Euro-zone financial markets and economies, CPI is still well above the ECB’s 2.0 percent target. Since the ECB’s primary mandate is to maintain price stability, a rate cut would put their goal of cooling inflation pressures in jeopardy. However, I do think the euro will ultimately fall lower tomorrow morning, as ECB President Trichet’s post-meeting press conference at 8:30 EDT tends to be the main driver of price action. While he is sure to harp upon the need for price stability, he cannot ignore the potential for recession and risks to the European banking sector, and this is what is likely to trigger euro selloffs.

Related Article: Euro Could Fall Further After Tomorrow's ECB Meeting


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