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CURRENCY ANALYSIS

ECB Cuts Rates (Refinancing Rate and Deposit Rate) Again

CURRENCY ANALYSIS ECB cuts rates again

The ECB (European Central Bank) shocked markets last week with a rates cut. They have cut the refinancing rate from 0.15% to 0.05% and the deposit rate by -0.1% to -0.2%. In addition, the ECB will be providing additional stimulus by buying a broad range of assets. This should revive growth in the economy as it has currently flat lined at 0.0% (Eurozone GDP q/q, Actual: 0.0%, Forecast: 0.0%, Previous: 0.0%, 05/09/2014). In addition this has devalued the Euro, which will help exporters in the Euro zone. Mario Draghi (President of the ECB) is keeping by his statement of doing 'whatever it takes' to help revive the economy. The cut in rates and the additional stimulus should help fight deflationary pressures. There is currently a big risk that the Eurozone may head into a deflationary spiral, CPI flash estimate y/y (Actual: 0.3%, Forecast: 0.3%, Previous: 0.3%, 29/08/2014) shows that the current rate is far from the 2% benchmark inflation rate. In addition, retail sales have dropped suggesting that consumers may be anticipating lower inflation in the future which is affecting their spending patterns (Actual: -0.4%, Forecast: -0.3%, Previous: -0.3%, 03/09/2014). Spanish and Italian PMI data have generally been fairly weak as displayed in the table below:

 

Services PMI data

Manufacturing PMI

 

Actual

Forecast

Previous

 

Actual

Forecast

Previous

Italian

49.8

51.7

52.8

Italian

49.8

51.0

51.9

Spanish

58.1

55.5

56.2

Spanish

52.8

53.4

53.9

 

This shows that there exists a huge slack in the Eurozone, that can only be cut using structural reforms that Mario Draghi has stressed time and time again. The ECB cannot impose structural reforms on individual countries in the Eurozone. The governments in these countries need to impose structural reforms. If these structural reforms happen then this will help the Eurozone recovery. We expect the ECB Monthly Bulletin (Release date: 11/09/2014) to provide us with some statistical insight about the latest rate cut and the prospective view of the economy.

New labour data suggest that the Fed are still running well below capacity. Janet Yellen (Chairwoman of the Federal Reserve) was correct in not implementing an early interest rate hike due to slack in the labour market. The data consisted of unemployment claims (Actual: 302K, Forecast: 298K, Previous: 298K, 04/09/2014) and Non-Farm employment change (Actual: 142K, Forecast: 226K, Previous: 212K, 05/09/2014) which were above and below forecast respectively. The latter showed that employees only added 142,000 jobs in August, which was a big disappointment. However, this didn't affect the greenback much as most of the attention was on digesting the Eurozone's information the day before. In addition, the US is making a faster recovery than the Eurozone and will likely be the second central bank to raise interest rates in mid-2015. We expect retail sales m/m (Forecast: 0.3%, Previous: 0.0%, 12/09/2014) to be on forecast due to the current strength of the recovery.

 

Support 2 (S2)

Support 1 (S1)

Current Price

Resistance 1 (R1)

Resistance (R2)

1.26691

1.28245

1.29485

1.31485

1.33531

 

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