fundamental alert

Euro Plummets as Euro-zone CPI Falls to More Than 2-Year Low, Suggest ECB Will Cut Rates January 15

Wednesday, 07 January 2009 00:48:25 GMT  |  Terri Belkas, Currency Strategist

The euro fell sharply across the majors on Tuesday as Euro-zone CPI estimates plunged more than expected to a 2-year low of 1.6 percent  in December from 2.1 percent. The severity of the decline was all the more important due to the index’s drop below the European Central Bank’s 2.0 percent inflation target, as we’ve already seen dovish comments by European Central Bank Vice President Lucas Papademos this week suggesting that the ECB may indeed cut rates on January 15. In light of this latest data, along with Mr. Papademos’s comments and ECB President Jean-Claude Trichet’s more bearish stance on economic growth, Credit Suisse overnight index swaps are moving ever closer to fully pricing in a 50bp cut to 2.00 percent. On Wednesday at 3:55 ET, the German unemployment change for the month of December is forecasted to rise by 10,000, which would mark the first increase in claims for jobless benefits since January 2006. This nominal change shouldn't impact the unemployment rate, which is anticipated to hold steady at 7.5 oercebt. Nevertheless, a rise in claims in line with or more than expected could trigger declines for the euro, which has already been under pressure as the markets bet the European Central Bank will cut rates next Thursday. However, it is worth noting that the impact of such releases tends to be very short-lived.

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