ECB Expect to Cut as Price Pressures Alleviate

Fundamental Headlines

• Citi to Cut More Jobs, Raise Rates on Its Plastic - Wall Street Journal
• Chances Are Slim for Stimulus, Auto Aid Till '09 - Wall Street Journal
• New wave of CDOs at risk of default - Financial Times
• Nomura Said to Plan Job Cuts Among Ex-Lehman Staff - Bloomberg
• Shareholders Pay Price as Barclays, UniCredit Raise Capital Like 'Casinos' - Bloomberg

EURUSD - The Euro-Zone is facing its first recession in 15 years as the advanced GDP reading for the third quarter showed that the economy contracted another 0.2% from the previous quarter. Yesterday, we saw that Germany, the largest economy in Europe, fell into a recession for the first time since 1996, while Italy, the third largest economy in the Euro-Zone, is facing the worst recession since 1992. Fears of a deep and prolong recession may lead the European Central Bank to lower the benchmark interest further as growth prospects deteriorate, and may continue to ease policy well into the next year as price pressures alleviate. The headline inflation reading for the Euro-Zone fell to 3.2% from 3.6% in September as food and energy costs continue to pullback from their record highs. In addition, prices pressures in Germany cooled for the third consecutive month in October as the final CPI reading showed that the headline reading slipped to 2.5% from 3.0% in September. Falling commodity prices paired with the drastic slowdown in the economy has certainly helped to lower inflation, which should allow the European Central Bank to hold a dovish outlook over the near-term. As price pressures weaken further, the ECB may cut borrowing costs well into the next year in order to avoid a severe recession. Meanwhile, Credit Suisse overnight index swaps are showing that investors expect the central bank to the interest rate by at least 100bp over the next 12 months, which could drag on the euro going forward.

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