Euro gets hit hard to start a new year of trading

Key events out of Europe next week

When it comes to fundamental catalysts that could trigger a EUR-rebound, there are several (scheduled) events on tap next week that could provide a spark, but mostly we see more EUR downside risk from them. First up is a press briefing by Merkel and Sarkozy on Monday around 1230GMT following private talks. We don’t expect any new initiatives addressing the debt crisis to come from the duo, but instead for them to finalize the details of the debt stabilization pact agreed in Dec. and to otherwise address topics for the Jan. 30 EU summit (Iran sanctions, financial transactions tax, etc.). If Chancellor Merkel reiterates her steadfast opposition to using the ECB as the lender of last resort or enlarging the size of bailout funds, EUR could take that badly.

Thursday sees the first ECB meeting of 2012 and the vast majority of economists expect no change to ECB policy or rates. However, we think there is a nontrivial chance that the ECB may cut rates another 25 bps to 0.75%. That raises the question of how much EUR selling this past week was the pricing-in of a possible ECB rate cut. If they don’t cut, does that prompt a short squeeze? If they do cut, how much more downside is available? Our crystal ball can’t see the answer clearly, so we will rely on the price levels outlined above. Also on Thursday, Fitch Ratings is expected to announce its outlook for EU sovereign credit ratings, which we don’t expect to be a happy time for Eurozone bond markets, banks, or the single currency.

Next page: The role of the U.S.

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