ECB Will Encourage Downside Break In Euro. By Nicholas Hastings
The hawkish stance of the European Central Bank is becoming more of a liability for the euro.
As a result, the single currency may well break out on the downside - not the upside, as many expect - from its recent narrow trading range against the dollar.
As the latest updated forecasts from UBS suggest, the euro is more likely to hit $1.30 in the next few months than the $1.50 it could reach by the end of 2011.
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Recent economic data, including strong consumer and business confidence surveys from Germany, as well as successful ECB injections of funds in euro-zone banks, have lifted sentiment about the growth prospects for the region.
ECB suggestions that it isn't considering cutting rates below the current 0.5% level have also helped to support the euro.
However, a stark reminder that the euro-zone economy may not be quite so robust as it appears on the surface came with Tuesday's news that, for the first time since consumer price records were collected for the region in 1961, prices had fallen on the year.
Forecasters suggest that this could last for several months - ensuring the euro-zone economy remains in its deepest recession since World War II for longer than anticipated.
"The risk is that the euro zone might ultimately enter a more prolonged and damaging period of deflation," said Daniele Antonucci, European economist with Capital Economics in London.
The fact that M3 money supply growth has also slowed sharply has simply added to concerns that the ECB's hawkish stance is not helpful.
"By any definition these indicators are flashing warning signals at the ECB: signals that cry out for lower rates," said Steve Barrow, senior currency strategist with Standard Bank in London.
The need for lower rates is even more imperative given that, unlike the Federal Reserve in the U.S. or the Bank of England in the U.K., the ECB didn't introduce any form of quantitative easing to help ease monetary pressures and bring an end to the credit crunch.
The ECB's defense that it has added liquidity through providing banks with greater access to central banks' funds. But, as Barrow points out, the ECB's balance sheet is only 25% higher than a year ago, compared with the 100% or more increases seen in the U.S. and the U.K.
Thus, those betting that the next monetary move from the ECB will be a hike, rather than a cut in rates, could well be surprised, as the deflationary pressure building in the euro zone not only reduces any hopes of an early economic recovery but ensures that the support which may be keeping the euro up against the dollar now soon starts to ebb away.
Early Wednesday in Europe, the euro was getting a small lift as market players squared positions ahead of the ECB's meeting as well as the release of U.S. non-farm payrolls Thursday.
A disappointing Tankan survey from Japan, with the diffusion index rising to only -48 instead of to -43 as expected, along with the unexpected decline in U.S. consumer confidence Tuesday, failed to damage risk appetite seriously.
Although equity markets were lower, the euro pushed ahead to $1.4041 by 0645 GMT from $1.4025 late Tuesday in New York, according to EBS. The single currency was also up at Y135.90 from Y135.13 while the dollar rose to Y96.79 from Y96.34.
As a result, the single currency may well break out on the downside - not the upside, as many expect - from its recent narrow trading range against the dollar.
As the latest updated forecasts from UBS suggest, the euro is more likely to hit $1.30 in the next few months than the $1.50 it could reach by the end of 2011.
Click Image to Enlarge
Recent economic data, including strong consumer and business confidence surveys from Germany, as well as successful ECB injections of funds in euro-zone banks, have lifted sentiment about the growth prospects for the region.
ECB suggestions that it isn't considering cutting rates below the current 0.5% level have also helped to support the euro.
However, a stark reminder that the euro-zone economy may not be quite so robust as it appears on the surface came with Tuesday's news that, for the first time since consumer price records were collected for the region in 1961, prices had fallen on the year.
Forecasters suggest that this could last for several months - ensuring the euro-zone economy remains in its deepest recession since World War II for longer than anticipated.
"The risk is that the euro zone might ultimately enter a more prolonged and damaging period of deflation," said Daniele Antonucci, European economist with Capital Economics in London.
The fact that M3 money supply growth has also slowed sharply has simply added to concerns that the ECB's hawkish stance is not helpful.
"By any definition these indicators are flashing warning signals at the ECB: signals that cry out for lower rates," said Steve Barrow, senior currency strategist with Standard Bank in London.
The need for lower rates is even more imperative given that, unlike the Federal Reserve in the U.S. or the Bank of England in the U.K., the ECB didn't introduce any form of quantitative easing to help ease monetary pressures and bring an end to the credit crunch.
The ECB's defense that it has added liquidity through providing banks with greater access to central banks' funds. But, as Barrow points out, the ECB's balance sheet is only 25% higher than a year ago, compared with the 100% or more increases seen in the U.S. and the U.K.
Thus, those betting that the next monetary move from the ECB will be a hike, rather than a cut in rates, could well be surprised, as the deflationary pressure building in the euro zone not only reduces any hopes of an early economic recovery but ensures that the support which may be keeping the euro up against the dollar now soon starts to ebb away.
Early Wednesday in Europe, the euro was getting a small lift as market players squared positions ahead of the ECB's meeting as well as the release of U.S. non-farm payrolls Thursday.
A disappointing Tankan survey from Japan, with the diffusion index rising to only -48 instead of to -43 as expected, along with the unexpected decline in U.S. consumer confidence Tuesday, failed to damage risk appetite seriously.
Although equity markets were lower, the euro pushed ahead to $1.4041 by 0645 GMT from $1.4025 late Tuesday in New York, according to EBS. The single currency was also up at Y135.90 from Y135.13 while the dollar rose to Y96.79 from Y96.34.
- 1 July |
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