The euro has fallen to a two-month low against
the dollar, weighed down by weak economic data that
bolstered expectations that the European Central Bank could undertake
aggressive monetary policy easing tomorrow.
In the euro zone, money markets are pricing
in a 54% chance of a 10-basis-point cut at Thursday’s ECB meeting.
However, the rate cut is not assured but we
think that the balance of risks suggests that the ECB would favour earlier
action as:-
The probability rose after the eurozone
purchasing managers’ index unexpectedly fell to a three-month low of 51.5 in
July from 52.2 in June.
Market based measures of inflation expectations
have failed to rise, with the June minutes highlighting “there should be
no room for complacency” when it comes to the “information content of
market-based measures of inflation expectations”;
Confidence over inflation reaching its goal has
softened, leading to questions over the viability of the ECB’s asymmetric
definition of price stability.
The euro has already shed 2% of its value this
month as investors priced in the probability of euro zone borrowing costs
falling deeper into negative territory.
The Fed is expected to cut rates next week so
not joining the easing party might positively impact the EUR.
