Why An ECB Rate Cut Is Unlikely, Setting EUR/USD Up For A Rebound

Includes: FXE, UDN, UUP
by: FXstreet

Last week saw the euro plunge against the dollar on speculation that the European Central Bank may move to cut rates from an already-low 0.5 percent.

The nosedive of the common currency came after eurozone inflation numbers significantly missed expectations. The Eurostat flash headline rate fell from 1.1 percent to 0.7 percent year-on-year with core inflation falling from 1.0 percent to 0.8 percent.

EUR/USD fell from a week opening of USD1.3785 to close the week at USD1.3487.

In addition to weak inflation numbers, eurozone unemployment continued to hold at a 12.2 percent in September, maintaining the August rate but up year-on-year from 11.6 percent.

About 19.45 million people were unemployed in the eurozone in September. Greek unemployment is at 27.6 percent and Spain at 26.6 percent.

The weak inflation and soaring eurozone unemployment drove bets that the ECB would move to cut rates. But it is difficult to see a scenario where the central bank would move to do so.

First of all, it would mean that eurozone policymakers would have to tear up the script from which they have been speaking in recent months on steady eurozone recovery. The drastic move of cutting rates further or even contemplating negative rates would implicitly signal that any recovery has died out.

Similarly, when Mario Draghi speaks on Thursday, he is unlikely to announce any further LTROs, especially ahead of the ECB's much vaunted bank stress tests and the snapshots of bank balance sheets to be released on 31 December.

While Mario Draghi may not use his speech on Thursday to rule out further ECB tightening or market intervention, it is very difficult to see a rate cut in December, setting the pair up for a reversal of much of last week's gains.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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