 |
 |
About GAIN: News & Events |
|
|
|
|
|
|
RESEARCH NOTE: ECB Rate Decision Preview
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: On Thursday, January 15 at 0745ET/1245GMT, the ECB will announce its decision on interest rates. We expect the ECB to cut rates by 1/2% from 2.50% to 2.00%, which is also the market consensus. However, the potential outcomes span the range from steady rates to a 1.0% cut, and we think the risks are skewed to the downside, meaning the ECB cuts more aggressively than expected. The economic outlook certainly favors aggressive easing (see below). Another potential outcome is that the ECB cuts by 50 bps now and Trichet, in his 0830ET/1330GMT press conference, then indicates further cuts may be needed. We foresee EUR weakness regardless of the outcome, as less easing, which may prompt an initial bounce, will be seen as dooming the European outlook even further, while more aggressive easing will be seen as an acknowledgement of the ever-weakening outlook.
Trading Strategy: In our opinion, we like a short EUR/USD strategy going into the ECB announcement (currently 1.3175) and would look to add to shorts on strength in the 1.3250/80 area. We would stop out on strength over 1.3350. Our initial take profit objective would be 1.2950, just above the base of the Ichimoku cloud at 1.2937 on Thursday. However, we see the potential for an even sharper decline in EUR/USD, which may see a daily close below the cloud, so we will remain flexible. We would lower our stop to 1.3200 if 1.3070 trades.
Economic Analysis: More cracks are appearing in the foundation of Eurozone fundamentals. The December PMI composite was revised down to a paltry 38.2 and is down from 38.9 in November and 43.6 in October. Indeed, the deterioration in this index is commensurate with the slowdown in the US ISM manufacturing and services indices - and we all know how dire the prospects for US growth have become. It wasn't merely business that was downbeat either, as consumer confidence plunged to its lowest level on record in December, dropping to -30 from -25 the prior month. This took out the previous low set back in 1993 when the global economy was still reeling from the US Savings & Loan crisis. These forward looking confidence metrics clearly point to more economic pain ahead in the Eurozone. Lastly, today saw Nov. EZ industrial production fall further, dropping from -5.7% YoY to a new low at -7.7%, auguring poorly for Dec. IP.
Talk out of the ECB members also suggests rate cuts are in the offing. The most compelling comments were those from ECB Vice President Papademos and council member Constancio. Both said that the central bank may need to reduce rates if inflation falls below the target 2.0% rate. Well wouldn't you know that the CPI inflation estimate for December plunged to 1.6% from 2.1%, the lowest level since October 2006. This result will leave many of the more hawkish ECB members hard pressed to argue that inflation remains a risk near-term. If that isn't enough, ECB President Trichet reportedly indicated that recent data could prompt a rapid response from the ECB to combat the dire state of the economy and use some ammunition it has been saving in case downside risks materialize. Clearly, the evidence points to an ECB that is ready to act.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
|
|
|
|
|
|
Overview