EUR/USD: Euro Falls as ECB Keeps Door Open for Further Easing

A downbeat assessment by the European Central Bank is presumed to continue weakening the Euro today opposite the US dollar. In its final monetary policy meeting this year, the ECB admitted that it considered an interest rate cut and predicted that the Euro Zone economy would shrink again in 2013, leaving the door open for a possible reduction in rates in the coming months.

ECB President Mario Draghi revealed that the policymaking Governing Council held a wide discussion on interest rates before opting to leave them on hold. The bank also touched on the idea of cutting its deposit rate into negative territory, a move that will likely spur banks to put their money to work elsewhere. As the dust settled, the ECB left its main interest rates at a record low of 0.75 percent for the fifth consecutive month despite fresh grim estimates. The bank forecasts that Gross Domestic Product for the Euro Zone economy would be within the range of -0.9 percent to minimal growth of 0.3 percent next year, suggesting contraction is far more likely. In September, the ECB predicted a higher range of -0.4 percent to 1.4 percent growth. The midpoint forecast for 2012 was also pushed slightly lower to -0.5 percent.

Meanwhile, the ECB forecasts inflation to lie within 1.1 percent to 2.1 percent next year. Compared with its target of close to but below two percent, the estimate likely signifies that there appears plenty of room to cut rates further. According to economists, the gloomy economic forecasts, the somber tone of the ECB statement and Draghi’s admission of a wide discussion on a number of easing issues have opened that door for a rate cut early in 2013. Late into 2013, Draghi said that economic activity would gradually recover as global demand strengthens, but he warned that the political deadlock over the US’ fiscal policy could weigh on sentiment for longer.

While the financial markets have calmed since the central bank pledged to do what it takes to preserve the Euro, the bloc’s economy has plunged into a recession from which it is showing few signs of emerging soon. The weakness has even permeated into the bloc’s powerhouse Germany. Today, Destatis is awaited to report that industrial output in Germany fell for a third consecutive month in October as weak demand continued to debilitate production. German industrial production is projected to have dipped by 0.4 percent during the month, failing to recover from the 1.8 percent drop in September. On grim signs for the Euro Zone economy, a short position is advised for the EUR/USD today.

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