Euro/Dollar Trading Lower After ECB Cuts Growth Forecasts
Policymakers advised that the ECB (European Central Bank) held a "very serious" debate around a potential rate cut earlier in the week. The ECB ultimately held interest rates at the current record low (0.75 percent). Nonetheless, the rate cutting rhetoric has seen the euro/dollar currency pair drop from recent resistance range highs, with the shared currency now trading back under the key 1.3000 level once again. ECB focused concerns have the potential to weigh on the European currency over the coming trading sessions. The ECB president Mario Draghi advised that a potential interest rate cut and even the prospect of a negative interest rate were discussed at a recent meeting.
Significant downward revisions were seen in growth and inflation projections. The ECB’s quarterly forecast highlighted a significant delta from September’s projection, with Eurozone GDP contracting 0.3% in 2013, versus the prior forecast which predicted a 0.5% growth figure. The growth forecast does not inspire confidence and the Bundesbank stated that "the balance of risks is on the downside". The Bundesbank also advised that "Given the difficult economic situation in some euro-area countries and widespread uncertainty, economic growth will be lower than previously assumed".
The markets reaction to events this week has been to sell the euro as a breach of the 0% floor could open up the potential for additional rate cuts into negative territory. This kind of scenario could see the euro under increased pressure versus currencies including sterling, the commodity currencies and potentially the U.S dollar. The upcoming European Council meeting on 13/14th December and the Eurogroup meeting on 13 December are a focus heading into next week, as is the German ZEW economic sentiment index.
From a technical analysis perspective, the EUR/USD 1.3000 handle remains as a key upside level, with the major currency pair closing last week around 75 pips under this area. The latest Commitment Of traders data from the CFTC (Commodity Futures Trading Commission) revealed forex futures traders continued to cover bearish euro wagers, decreasing the aggregate short euro FX position by around 50% on the weekly basis.