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Euro Under Pressure, What to Expect from ECB?

Last updated 1/11/2012 10:29 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

The sell-off in the EUR/USD stalled for two trading days but now appears to be gaining momentum. We have been skeptical of the EUR/USD's recovery since the beginning of the week and the latest price action in the currency pair indicates that even though short euro positions are at the highest level ever, investors continue to sell euros. German Chancellor Merkel met with Italian Prime Minister Mario Monti this morning and the main takeaway from their meeting was Merkel's comment that Germany could pay more capital into the European Stability Mechanism (ESM) to "send message to markets." She also announced plans to hold a meeting in Rome with Monti and Sarkozy on Jan 20 - just ahead of the Jan 30 summit meeting. Her increased commitment to stabilizing the region should have lent support to the euro and did temporarily but its overall weakness was just too overwhelming. This morning's weaker GDP report from Germany certainly did not help - the economy grew by only 3 percent in 2011 compared to growth of 3.7 percent in 2010, raising concerns that the economy could have contracted in Q4. Such weak growth numbers won't make life easy for the European Central Bank who has a monetary policy meeting tomorrow. 

What to Expect from the ECB?

Having just lowered interest rates in December to 1 percent, the central bank is not expected to ease again, particularly since last month's rate cut came with a new program that makes it easier for cash strapped banks borrow. The ECB will want to give the economy time to absorb the latest round of easing before pumping more money into the economy. With some signs of improvement locally as well as globally, the ECB isn't under any pressure to act quickly. The string of positive economic reports in the U.S. will ease some of their concerns while the recent weakness of the EUR/USD does some of the work for the central bank by helping to stimulate the economy. Since the last monetary policy meeting, the unemployment rate in Germany declined and business confidence improved thanks to faster service and manufacturing activity. However there are still many areas of concern including consumer spending which fell 0.9 percent in November and investor confidence which plummeted in December. Yet even though the ECB will most likely forgo additional easing on Thursday, Mario Draghi will probably leave the door open for more stimulus, with the possibility of cutting rates by another 25bp in the first quarter if the slowdown gains momentum. The central bank is also under pressure to support Italy which means that any cautionary comments will hurt the euro. 

The following table shows how the Eurozone has performed since the last monetary policy meeting:

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Comments (1)

traderwillie

January 11, 2012 at 10:13 PM ET

Seems to me that the ECB risks further threats from the credit rating agencies if they do not at least make some sort of verbal commitment to "measures" of some kind to stimulate the troubled region.
Bill Jenkins
www.thefxtradingmasters.com
www.empowernetwork.com/traderwillie

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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.