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US ISM Points to More Jobs, EUR Killed by Draghi’s Pessimism

Last updated 11/3/2011 10:24 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

For the first time in more than 18 months, the European Central Bank cut interest rates by 25bp to 1.25 percent.  This was the first time that Mario Draghi is in the hot seat and his decision to lower rates shows that he wants to prove to the world he has what it takes to be the second most powerful central banker in the world,  Super Mario decided to ease monetary policy this morning to prove that he will be proactive and aggressive in fighting recession.  In his first ever press conference, Draghi explained that the downside risks have intensified and significant cuts to growth forecasts are likely.  Although price stability should be their number one priority, inflation is expected to fall further in coming months and for that reason, Draghi feels that fighting recession is more important than fighting inflation at this time.  Draghi had nothing positive to say about the outlook for the Eurozone economy and his unambiguously pessimistic comments sent the euro tumbling against the U.S. dollar.  Cutting interest rates was the right thing for Draghi to do particularly since there was no question that the ECB's staff forecasts would be revised lower next month - so why wait.  Draghi's pessimistic tone and his emphasis on the downside risks to inflation is not only a departure from Trichet but implies that another quarter point rate cut is on the table. Draghi sees Europe headed for a mild recession and to ward it off, rates could be slashed again in December.

Lower interest rates is ultimately positive for the Eurozone economy but the surprise rate cut by the ECB has broken the correlation between the EUR and stocks for the time being.  Yet the only reason why we have not seen a larger sell-off in the EUR/USD after the rate cut is because the Greeks are abandoning the idea of a referendum which is positive for risk appetite.  Therefore the fate of the EUR/USD still hinges upon the outcome of tomorrow's no-confidence vote in the Greek Parliament and the response by Papandreou.  If the government completely collapses, we could see further weakness in the euro.  

Meanwhile lost in the ECB excitement was the U.S. non-manufacturing ISM report that showed service sector activity slowing slightly in the month of October.  The non-manufacturing ISM index fell to 52.9 from 53.0 due largely to weaker business activity, slower growth in new orders, inventory and prices.  Yet with non-farm payrolls scheduled for release on Friday, the increase in the employment component of the ISM report is encouraging because it points to stronger job growth in October.  In other words, we don't expect payrolls to be weak enough to put a dent into risk on Friday - leaving Eurozone developments and the G20 meeting as the main drivers of volatility.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.