Euro the Weakest of the Majors as ECB’s Monthly Bulletin Points to Deflation Risks

The euro was the weakest of the majors as evidence continues to point to another rate cut by the European Central Bank (ECB) and a move toward quantitative easing. On Tuesday 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, and heard 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.” On Wednesday Fitch announced that they had downgraded Ireland’s sovereign credit rating to AA+ from AAA, and issued a negative outlook. On Thursday the ECB’s monthly bulletin highlighted their concerns about growth both domestically and abroad, as well as the potential for inflation figures to fall negative mid-year. While they noted that short-term changes in price pressures would not impact the central bank’s monetary policy decisions, it is hard to believe that the prospect of deflation is not disconcerting to many of the ECB’s voting members. By Thursday’s close, Credit Suisse overnight index swaps were now pricing in a 21.5 percent chance of a 25 basis point cut to 1.00 percent during the ECB’s next meeting, but there is plenty of time for market expectations to shift ahead of that May 7 meeting.