Published: Thu, 05 Mar 2009 16:54:30 +0100

Euro Remains Volatile as Market Digests Weak Growth Forecasts

(CEP News) - Currency markets were volatile this morning following comments from European Central Bank President Jean-Claude Trichet.

The euro is retracing some of its losses following a weak growth outlook from the European Central Bank. Despite the modest recovery, currency strategists are expecting the euro to continue to fall.

On Thursday, the ECB dropped interest rates by 50 basis points to 1.50% but, according to currency strategists, the weak economic outlook had the most impact on the currency. The euro lost ground across the board, hitting session lows against the yen, sterling and U.S. dollar, following the ECB staff growth projections.

During the press conference following the rate decision, Trichet said both global and domestic demand will continue to slow in 2009. According to the latest staff projections, the ECB sees growth between -3.2% and -2.2% in 2009 and -0.7% and +0.7% in 2010.

EUR/GBP hit a session low of 0.88538 GBP following the start of the ECB press conference, but has since recovered modestly, trading modestly below 0.89 GBP. Meanwhile, EUR/USD hit a session low of 1.2481 USD, but has since recovered and is trading above 1.25 USD.

"The downward revision to growth surprised the currency markets," said Ian Stannard, senior currency strategist at BNP Paribas. "However they are more in line with what the market expects and it shows that the ECB is finally waking up to this economic crisis."

Stannard said the weaker growth forecasts are causing the markets to price in more interest rate cuts, as well as quantitative easing measures, in what the ECB is calling "non-standardized measures."

Weaker growth forecasts and the expectation of more rate cuts down the road will keep pressure on EUR/USD, according to Stannard. He said there are risks that the cross retests the October 2008 lows at 1.2335.

Boris Schlossberg, director of currency strategy at GFT, said he is also expecting the euro to remain under pressure as long as the euro zone is unable to come together and provide a stimulus plan.

"The market is looking for a significant stimulus plan and so far nobody has released anything substantial," he said.

Schlossberg said the ECB's effort to create non-standard policy measures is promising, but that the implementation of such measures will take time.

"I think they have a desire to come up with some plans but the framework just isn't there," he said.

Schlossberg said he is watching 1.25 in EUR/USD and that a break below that level could lead to a new wave of euro selling.

Euro/USD down 1.03 cents to 1.2557

USD/CAD up 0.81 cents to 1.2813

USD/Yen down 0.84 points to 98.32

GBP/USD down 0.68 cents to 1.4126

AUD/USD down 0.64 cents to 0.6431

Euro/Yen down 2.07 points to 123.45

Euro/GBP down 0.31 pence to 0.8890

GBP/CAD up 0.27 cents to 1.8098

CAD/Yen down 1.17 points to 76.73

Euro/CAD down 0.30 cents to 1.6089

The U.S. Dollar Index is up 0.31 points to 88.89

All data taken at 10:50 a.m. EST

By Neils Christensen, neilsc@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca