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Forex Flash: ECB rhetoric increases rate cut speculation - BTMU

FXstreet.com (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that ECB rhetoric of late is understandably leading to increased speculation that the ECB will cut the refinancing rate at the next meeting in May.

He writes, “We have always had a rate cut pencilled, but had expected a move in June, in line with the release of the next ECB forecasts, or in July. However, the steady stream of rhetoric hinting at the scope for easing makes us now believe that the greatest probability of a rate cut is now at the May meeting.” He continues to adds that the decline in German manufacturing and services PMIs yesterday will clearly raise concerns within the ECB Council over a slowing in growth in the core of Europe. He sees that France is already in recession and weak growth in Germany would be problematic.

He writes, “Of course a 25bp cut in the refi rate to 0.50% is hardly the answer to the euro-zone’s troubles, but nonetheless, any shift in inflation risks to the downside from the current 1.3% forecast for next year legally obliges the ECB to act in any way it can.” He finishes by noting that additional steps to try and improve credit flow to the periphery may also be announced next week. The IFO index will be released today and if consistent with the PMI data will only reinforce the positioning for an ECB rate cut next week. As we expected, the euro is holding up given the offsetting forces – the US is also slowing and the BOJ has eased aggressively.

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