Euro Hits 1 Yr Low on Trichet’s Comments: Is He Open to Coordinated Easing?

The European Central Bank President has finally buckled under the weight of bank failures, recessions and slower global growth. Although the ECB left interest rates unchanged at 4.25 percent this morning, Trichet has paved the way for an interest rate cut before the end of the year. This has driven the Euro to the lowest level against the US dollar in more than 12 months and the lowest level against the Japanese Yen in more than 2 years. It is important to realize that this is a dramatic departure from the Trichet’s stubbornly hawkish stance, especially since he raised interest rates as recently as July. It also suggests that he may not be opposed to coordinated easing. If the US bailout plan fails to stabilize the markets, central banks around the world could cut interests at the same time, which would send a strong message to investors and put an end to the weakness in equities.

Jean Claude TrichetUnfortunately Trichet had no choice but to be more dovish given the fact that there were 3 separate bailouts in the Eurozone (Fortis, Dexia and Hypo Real Estate Group) and Ireland has fallen into an official recession with Spain and Germany are expected to follow suit.

Only 2 Options – Keep Rates Unchanged or to Cut Them

It was only a matter of time before ECB President Trichet acknowledged the slowdown in growth especially as members of the region struggle with recessionary conditions. In fact, more specifically he indicated that the downside risks have increased and the turmoil in the financial markets complicates their near term outlook. On inflation, the drop in oil prices has allowed him to finally say that there has been a reduction in upside price risks.

In general, Trichet is not a fan of surprises and if he plans on cutting interest rates, he usually tries to prepare the market for the cut by adopting a slightly more dovish tone – which is exactly what we saw today. At the meeting, only 2 options were discussed, leaving interest rates unchanged or cutting them. Raising interest rates is out of the question.

ECB Could Cut Interest Rates by 100bp

The market is currently pricing in 100bp of easing over the next 12 months. The potential expansion in interest rate differentials between the Euro and the US dollar should continue to add pressure on the EUR/USD. The next major support level is not until 1.35.

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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