Euro under pressure as ECB
indicates cut to deposit interest rates
The euro has been hit by a few different factors in
the past few sessions. ECB President Draghi gave the single currency a knock
last Thursday by revealing that whilst there would be no change to the Bank’s policy
this month, we might expect some monetary easing next year. From Draghi’s
comments, we no longer draw the conclusion that the ECB will cut the headline
interest rate in Q1 next year. However, there were real indications that if
growth disappoints and eurozone nerves spike in the coming months, we could see
a cut to the deposit rate in a bid to encourage banks to step up lending.
Both the ECB and the German central bank (the
Bundesbank) have delivered some fairly gloomy growth predictions in the past
week. The former now sees the eurozone economy contracting by 0.3% next year,
after previously predicting growth of 0.5%. Meanwhile, the Bundesbank
disappointingly slashed its forecasts for German growth next year; reducing its
June forecast of 1.6% growth to 0.4%.
We have had some good news today on the German front
however, with a key economic sentiment survey hitting a seven month high. The
latest sentiment and confidence surveys out of Germany suggest the country may
narrowly avoid a recession, though a contraction in Q4 2012 looks highly
likely. The German economy may not be in as weak as many had expected but the
hopes for the rest of the eurozone are rather dimmer. This could well be
highlighted by Friday morning’s eurozone PMI growth figures.
Italy
hits the headlines as PM Monti announces resignation plans
Technocratic Italian PM Mario Monti dropped a bomb
over the weekend by announcing his intention to resign once the Italian parliament
has passed its 2013 budget. Berlusconi is waiting in the wings but his approval
ratings suggest this is too big a mountain for even him to climb. Nonetheless,
this political uncertainty - which raises serious question marks over Italy’s ability
to deliver the necessary cuts and economic reforms to keep bond yields stable -
could weigh on the euro significantly in the coming weeks and months.
All eyes on US Federal Reserve QE decision
Last week’s surprisingly strong figures from the US labour
market are unlikely to satisfy the US Federal Reserve at its meeting over the next
two days. We expect the Fed to decide to replace Operation Twist (which is set
to be concluded) with a further $40bn in asset purchases, to bring its QE
programme up to $80bn per month. There are various tweaks that the Fed can make
to its monetary policy, to which the US dollar will respond differently. Given
that sterling is trading at a very healthy rate of $1.61 at present, we would
urge dollar-buyers to act now.
End of week forecast
|
GBP /
EUR
|
1.2450
|
|
GBP /
USD
|
1.60
|
|
EUR /
USD
|
1.29
|
|
GBP /
AUD
|
1.53
|
|
|
|
Sterling has enjoyed a welcome little recovery against
the euro amid some rather negative eurozone developments. At €1.24, we have not
abandoned hopes of one last push for €1.25 before the end of the year. There is
not much to get excited about with respect to sterling at present but we do
expect enthusiasm towards the euro to wane from here. A move below €1.23 is looking
increasingly unlikely.
Richard Driver
Currency Analyst
Caxton FX
