Euro Slips Further as Ireland’s Credit Downgrade by Fitch Adds to ECB Rate Cut Risks

The euro remained under pressure versus most of the majors yet again as evidence continues to point to another rate cut by the European Central Bank (ECB) and a move toward quantitative easing. Yesterday we saw that the final reading of Q4 GDP was unexpectedly revised to a new record low of -1.6 percent from -1.5 percent, due primarily to downward revisions to gross fixed capital formation (capital goods investment) to -4.0 percent from -2.7 percent. We also saw, ECB Governing Council member George Provopoulos say during an interview that the bank’s benchmark rate could be cut by at least another 25 basis points, as he did not “see 1 percent as a threshold,” and that he would “not exclude that the ECB could go down further from this level if the economic environment deteriorates further.” Then, today, Fitch announced that they had downgraded Ireland’s sovereign credit rating to AA+ from AAA, and issued a negative outlook. While S&P already did the same on March 30, the news only highlights the extent of the economic woes for the Euro-zone. All told, Credit Suisse overnight index swaps are now pricing in a 36 percent chance of a 25 basis point cut to 1.00 percent during the ECB’s next meeting, up from 22.5 percent on Tuesday, but there is plenty of time for market expectations to shift ahead of that May 7 meeting.