The ECB could come under pressure from several EU politicians to review its monetary policy. Lower interest rate differentials could make the euro less attractive to foreign investors and the lower level of demand for assets denominated in euros could accelerate the losses in the EUR/USD.
The ECB has been caught in a very difficult situation having to chose between slowing growth and rising inflation
Last month, annual inflation in the euro area fell to 3.8 per cent from 4 per cent in July, according to Eurostat. However, despite the recent easing on energy prices, the European Central Bank remains very concerned about price stability. To some extent, the ECB is worried about second round effects of energy prices since many employees want to renegotiate their salaries so they can afford to pay for gas prices. Nonetheless, the Governing Council of the ECB will soon come under pressure from EU politicians to review its monetary policy.
Recent economic data points towards a weakening of real GDP growth in the euro zone economy and a more accommodative monetary policy could be needed to prevent the region from falling into a recession. In fact, traders expect the ECB to cut rates by nearly 50 bps over the next 12 months, according to overnight index swaps. On the other hand, the recent sell off in commodities, particularly in oil, should alleviate some downward pressure in the U.S. economy and we expect the Federal Reserve to increase rates by almost 75 bps in the next 12 months. Lower interest rate differentials could make the euro less attractive to foreign investors and the lower level of demand for assets denominated in euros could accelerate the losses in the EUR/USD.
Source: Tradestation
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Written by Antonio Sousa, Chief Strategist Questions? Comments? E-mail: asousa@fxcm.com
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