The EUR/USD pair made a clean break below 1.40 just before Wednesday’s New York close, and since then euro has consolidated above 1.39 as the European Central Bank’s monthly bulletin left the markets pondering the potential for a rate cut in the near-term.
The ECB noted slowing growth as they said, “the euro area economy is currently experiencing an episode of weak activity characterized by high commodity prices weighing on consumer confidence and demand, as well as by dampened investment growth.” However, the central bank was somewhat optimistic about the outlook, noting that a persistent drop in oil prices from their record highs in July should “help strengthen real disposable income, with the level of employment remaining high and the unemployment rate low by historical standards.” Meanwhile, the ECB remained hawkish as they forecast that annual inflation rates would remain well above their 2 percent target for a “protracted period of time” while “upside risks to price stability over the medium term prevail.” This hawkish stance was not enough to quell rate cut speculation, as Credit Suisse overnight index swaps are now pricing in nearly 50bps in reductions by the ECB over the next 12 months, compared to 25bps in cuts just two weeks ago. Thus, [B]from a fundamental perspective there’s still downside risk for the euro, but from a technical perspective, looming support may prevent significant declines from current levels.[/B] Indeed, the 50% fib of 1.1638 - 1.6041 at 1.3840 aligns with the July 2007 highs near 1.3850, providing a good profit-taking level for EUR/USD bears.
[B]Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.[/B]