EUR/USD (1.3815) Forecasters largely failed to predict an ECB rate cut yesterday, but not for economic reasons. They had not ignored the possibility that a deteriorating growth outlook in the eurozone could combine with sizeable base effects to put considerable downward pressure on inflation next year. The ECB itself had clearly signalled over the last two months that the ground was shifting below our feet on the inflation and growth fronts. No, the reason for the scarcity of rate cut predictions was that few thought the new president, Mario Draghi, would be willing to be labelled a dove on his very first outing. They thought the cut was coming, but only in December. However, Draghi does not decide alone and the Governing Council’s was unanimous. So, the change in direction of monetary policy had little to do with the change at the top; even a hawkish Draghi would not have been able to prevent it. This also suggests that the ‘no change’ decision last month may have been more border-line than the market suspected at the time. Of course, a quarter-point cut is not going to do much to resolve the debt crisis or to support growth, so the market wasn’t too sure what to make of it – the euro slumped to a day-low during the press conference only to rally back to a new day-high thereafter. The only thing that is clear is that tightening cycle is over.
We continue to see a downside risk to 1.3510. Initial supply remains at 1.3875, but a stabilisation will now only be possible above 1.3915.
Market Bias Index
The EUR/USD has again shifted back to its perceived fair-value. The yen, in contrast, is likely being perceived as increasingly undervalued versus both the euro and the dollar.
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Deutsche Bank
Fixed Income Research – Global