fundamental alert

ECB Lowers Inflation and Growth Forecasts, Raising Expectations for Lower Borrowing Costs

Thursday, 13 November 2008 08:15:37 GMT  |  DailyFX Research

ECB monthly report echoes Trichet's statement last week with the editorial stressing saying that the crisis is likely to damp demand for a "rather protracted period". It also called on the banking sector to help improving sentiment. The report releates that the outlook for price stability has improved and that inflation is slowing, which together with a clearly more pessimistic view on the growth outlook backs expectations for another rate cut from the ECB next year.
In addition, The ECB's survey of professional forecasters cuts 2009 GDP forecast to 0.3%, down from an expected 1.3% in the last survey. The growth estimate for this year was cut to 1.2% from 1.6% and the forecast for 2010 was trimmed to 1.4% from 1.8%. At the same time inflation is expected to come down quicker than previously expected with the 2009 forecast cut to just 2.2% from 2.6% in the previous survey. The forecast for 2010 was cut to 2.0% from 2.1% and the longer term forecast was marginally lower - at 1.99% vs 2.03% previously. All this is not a surprise and in line with the ECB's comments. The ECB's own projections, due to be released in December, are likely to show similar changes and data will add to the arguments for another 50 bp cut at the next meeting.
Meanwhile, Euro-Dollar (EURUSD) recovered from early European lows to trade back above the 1.2500 handle. The pair came under heavy selling pressure in the first 30 minutes of trade in Europe as the market responded to weak German Q3 GDP data, which was much weaker than expected at -0.5% q/q, while French October HICP inflation came in at 3% y/y. EUR-USD fell over 100 pips to hit 1.2389 lows, with macro account selling and large interest generally for dollars amid talk of hedge fund redemption flows. Good Asian account demand was noted underneath 1.2500, while a decent short covering rally in the JPY crosses has aided the upturn. EUR-JPY traded up to 120.14 highs from early European lows of 118.30, while EUR-CHF extended its move above 1.4800 to trade up to 1.4882 highs. We expect the euro to run in to supply on strength, but action so far is highly correlated to equity markets and subsequent interest via the crosses.

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