Nothing is going any where fast, at least not until the Euro Summit shows and plays its hand we think. The one note of consistence it seems in the last 24-hours is how many analysts have revised their 12-month prediction for the EUR. The results are rather similar with analysts now pegging the currency lower from previous guesses of 1.35 to an average of 1.20-25. Reading the choices has distracted one watching the price action Ã¢â‚¬Å“paint dryÃ¢â‚¬Â!
European optimism is tentative, however, global bourses have found some traction and advanced to a five-week high amid market speculation that Euro-area leaders will agree on enhanced bailout measures for indebted nations and stricter rules for budget control at the summit. Before anything will be disclosed the market has to contend with the ECB rate decision tomorrow.
It seems that many are now leaning towards an earlier rate cut by the Central Bank. Some analysts expect Draghi to cut key interest rates tomorrow instead of January. The market is pricing in a-25bp ease to +1% and is now anticipating further cuts in Q1, taking the rate as low as+0.5%. A cut alone will not be enough. Policy makers will be expected to be thinking outside the Ã¢â‚¬Å“boxÃ¢â‚¬Â. The ECB is also seen as likely to increase Ã¢â‚¬Å“nonstandard measuresÃ¢â‚¬Â to alleviate bank funding issues. That may include longer liquidity tenders or a temporary easing of collateral requirements.
Data and auctions this morning have been mixed. UK IP came in much weaker than expected in October, down by -0.7%, m/m, on both headline and manufacturing measures, solidifying a poor start to Q4. It looks set to subtract from GDP during the quarter. The fall in manufacturing was completely consistent with the fall in the manufacturing PMI survey over recent months. This relationship certainly points to worse news to come. Below par growth will require more job losses and wage restraint. Consumers can only hope that the Euro-zone does not deteriorate markedly so from here. The German 5-year bobl auction was well received. ItÃ¢â‚¬â„¢s natural that investors trust the quality of German paper, if they did not, the Euro hole gets larger. GermanyÃ¢â‚¬â„¢s EUR5b +1.25% 2016Ã¢â‚¬Ëœs offer received bids of +EUR8.7b leading to a very strongly received auction.
The EURÃ¢â‚¬â„¢s failure to make any headway in the low 1.34Ã¢â‚¬â„¢s, temporarily strangled by a 1.34 intraday option expiry opens up the possibility of the currency wanting to revisit this weeks earlier lows. The market is trying very hard not to be given or accumulate new positions ahead of the ECB and summit guidance.
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