Euro Drops As ECB Leaves Rates at 4.25%, Trichet Increasingly Bearish On Economy

Daily Forex Fundamentals | Written by DailyFX | Aug 07 08 13:12 GMT |

The European Central Bank left rates unchanged at 4.25 percent as expected, but the Euro has pulled back sharply as ECB President Jean-Claude Trichet appears to be turning his focus toward the downside risks to growth. As a result, traders are starting to consider the potential for a rate cut by the central bank within the next year.

Indeed, Mr. Trichet said that recent economic data pointed toward "a weakening of real GDP growth in mid-2008" following strong growth during Q1, and with Euro-zone Q2 GDP scheduled to be released on August 14, there are concerns that the economy actually contracted. Mr. Trichet went on to say that this slowdown reflected global growth conditions, thanks to high oil prices. Meanwhile, the ECB remains particularly hawkish on inflation, saying that CPI would remain above 2 percent for "some time" and that the recent data supported the latest rate hike in July. Since price stability is the ECB's primary mandate, the central bank will have limited ability to completely brush off the inflation data on hand in order to make monetary policy more accomodative. Nevertheless, the markets have taken the bearish notes on growth to heart, as overnight index swaps are now pricing in 25bps worth of rate cuts within the next year. Given this news, there is potential for EUR/USD to drop below near-term support at 1.54.

DailyFX