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European Central Bank Forecasts Economic Recovery in 2009, Stemming Bets for Lower Borrowing Costs

Thursday, 11 December 2008 11:04:39 GMT  |  David Song, Currency Analyst

The outlook held by the central bank suggests that a gradual recovery will take place as falling commodity prices help consumers to deal with the remarkable downturn in the economy.

Fundamental Headlines

• P&G Lowers Sales Outlook for Quarter – Wall Street Journal
• IEA: World Oil Demand to Contract – Wall Street Journal
• AIG plans $15bn disposals before year end – Financial Times
• South Korea, Taiwan Reduce Interest Rates as Recession Deepens – Bloomberg
• GM, Chrysler Short of Time as Senate Debates Rescue – Bloomberg

• EURUSD – The ECB’s December report showed that policymakers forecast the economy to recover in the second half of 2009 even as they expect demand to waver over the next few quarters. The outlook held by the central bank suggests that a gradual recovery will take place as falling commodity prices help consumers to deal with the remarkable downturn in the economy. Meanwhile, board member Jurgen Stark noted that the ECB may keep rate on hold until further economic developments become available, which lowered expectations for another rate cut at the January 15th policy meeting. Discuss the topic and your trade ideas in the EUR/USD Forum.

• CHFUSD – The Swiss National Bank lowered the 3-month target LIBOR rate by 50bp to 0.50% as expected, but lowered their growth and inflation forecasts for 2009 as the credit crunch continues to drag on the real economy. Deteriorating fundamentals lead policymakers to cut their growth forecast for 2009 as they expect the economy to contract 0.5%-1.0% next year, and expect price pressures to fall further as they lowered the inflation forecast to 0.9% from an initial projection of 1.9%. In addition, the central bank explicitly stated that they are willing to take ‘further measures’ to foster growth if needed, and noted that they expect price pressures to remain subdued going forward. The dovish commentary paired with mounting growth concerns suggests that the SNB will continue to ease policy next year as credit conditions remain far from normal, and may step up their efforts as policymakers carry out their dual mandate to ensure price For more news and resources, visit the new Swiss franc Currency Room.

• GBPUSD – The U.K. CBI industrial trends report unexpectedly improved as total orders increased to -35 from -38 in November. Meanwhile a deeper look into the report showed that export orders slipped to a five-year low of -32 from -31 in the previous month, while the stock of finished goods slipped to 21 from 25. Despite the minor uptick in orders, fading demands from home and abroad are likely to drag on production going forward, which would only heighten the downside growth risks for Europe’s second largest economy. Discuss the topic and your trade ideas in the GBP/USD Forum.

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