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ECB policy meeting: Cutting rates is not the answer.

By Brenda Kelly - IG Senior Market Strategist

Date: Wednesday 06 Nov 2013

ECB policy meeting: Cutting rates is not the answer.

The autumn economic forecasts from the European Commission this week were slightly more downbeat about Eurozone growth. Lest we forget, the European Commission hasn’t got a great track record in regards to accurate forecasting, but the expectation from the commission that GDP in the Eurozone will rise by 1.1% next year, compared to the 1.2% rise forecast last May.

Generally, lots of attention is given to central bank rate settings and US employment numbers and the market moving effects of such events have long since been proven.

Thursday brings with it no fewer than two central bank statements, one from the Bank of England and the other from the ECB.

Let’s be clear. There is very little the ECB can do about growth. Certainly, providing price stability is important but it’s the individual EU countries and the leaders that need to step up. The effects of austerity, long berated by many are clearly not the panacea for the troubled Eurozone. So it’s mostly fiscal policy that needs to change rather than monetary policy.

Some would say, that while a single currency has its merits, this ‘one size fits all’ scenario which applies to both types of policy and the problems that arise from this situation are the constant flaw in the euro project.

Generally, lots of attention is given to central bank rate settings and US employment numbers and the market moving effects of such events have long since been proven.

Thursday brings with it no fewer than two central bank statements, one from the Bank of England and the other from the ECB.

The ECB has come under some significant pressure in recent weeks to act as the appreciation of the trade weighted euro reached highs that threatened to overcome the fragile recovery. News that the Eurozone CPI fell as low as 0.7% year on year in September has spooked economists and market participants alike, yet it would be out of character for the ECB to act on a single data point and cut rates in an effort to avert a deflationary spiral.

In fact it must be said that Wednesday’s macro data was altogether more positive. The final services PMI for Europe came in slightly ahead of expectations in October and showed a composite expansion for the fourth consecutive month. German factory orders surged in September rising by 3.3% against a consensus of a gain of 0.5%.

Some major banks such as Bank of America, UBS and Royal Bank of Scotland (RBS) have forecast the ECB will cut the rate at the meeting – I would temper that a specific announcement and date may be given for an additional LTRO programme to add much needed excess liquidity into the banking system.

If anything, the mere speculation of a potential rate cut has had the desired effect and seen the euro fall some 300 pips against the dollar in short order from the 1.3833 highs. Short term, the minor double bottom on the hourly chart with its base at 1.3450/60 could imply that we will be seeing a test of 1.36 before we see any further downside in the single currency.

The base line of 1.3440 should be closely watched- many stop losses will reside at or just below this level so any drop off could see quite a spike lower and will target 1.34 (100 DMA) in short order.

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