ECB to cut rates - or Foreign Exchange Traders to sell Euros

Foreign Exchange Outlook : We get retail sales and various other bits and pieces of data today. We say the institutional landscape holds more importance for foreign exchange traders today. Bernanke gave a sane and reasonable speech yesterday that marks out the path forward—no surprise: more public money backing for banks. As noted above, Congress wants specific spending for homeowners and the Fed is not delivering that. To be fair, it's not the Fed's job to make a value-judgment spending decision like that with big fiscal implications. Still, the Fed and Congress are aggressive and activist, which is US dollar favorable, even if we have big doubts about the Treasury.

All eyes are on the ECB to see if it comes up to Fed standards, and so far the voting is that it does not. A Market News story yesterday says "ECB member opinions remain divided in terms of the magnitude of the cut (50 basis point cut or more/less) and there are still concerns about a rebound in inflation. Though deflation worries have crept in, many members of the Governing Council fret that inflation could sneak back into the picture over time if the bank is not careful with its monetary policy. One senior source stressed that if the ECB does cut rates, the central bank would not follow the U.S. lead and said, 'The two situations are different.' He said that it was 'possible' that the economy had already hit bottom. At the very least, 'things should not get worse,' he argued. 'The next six months will still be difficult for the real economy, then we'll see. It's difficult at this moment to make projections and premature to say what the ECB will do.'"

Well, no.

Such a view is 180 degrees away from the consensus view of private sector economists, nearly all of whom believe things are going to get worse before they get better. We have seen only one forecast of improvement before the second half of this year, and that’s for the US, not Europe. The comment from this unnamed "senior source" at the ECB reflects a mindset of denial and delay that has beset the ECB from the beginning. If the ECB does indeed cut by only 25 bp tomorrow - or not cut at all - the euro exchange rate will be punished. In fact, it looks like it would take a cut of 75 bp (the new whisper number) to overcome the refreshed dislike of the ECB that has emerged this week. Markets are rewarding activism - consider sterling last week.

We shall see if they punish ostriches.

We imagine the US Dollar exchange rate will recover smartly from the corrective pause/bounce and that new fretting and fussing over US deficits will fail to grip foreign exchange traders imaginations. That means the euro to us dollars exchange rate "should" fall under 1.3000, and this week.

Note to Readers: Next Monday, Jan 19, is Martin Luther King Day and a national holiday in the US. The market is closed and we will not publish any reports. The next day is the Obama inauguration, yippee.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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