The Euro dropped 200 points today on the back of broad dollar strength, weaker economic data and increasingly dovish comments from ECB officials. In contrast to the central bank’s fears of rising inflationary pressures, German producer prices dropped 0.1 percent last month.
This was not much of a surprise since wholesale prices dropped for the first time since October 2006. ECB members are growing less hawkish which reduces the risk of an interest rate hike from the ECB in the first quarter. We believe that the massive drop in European equities and the continual problems in the subprime and financial sectors will force the central bank to remain on hold over the next few months and possibility even for the remainder of the year. ECB members are already growing less dovish. Last week, Mersch switched his bias from hawkish to dovish and today, Wellink warned that the Eurozone economy is likely to slow more than the central bank initially expected. Once again, we expect the ECB to be all talk and no action.