Last Friday saw the euro close on a new drop reaching almost our target of 1.3300 against the dollar despite the German Parliament approved legislation to increase the euro-zone bailout fund’s lending capacity last Thursday. Meanwhile, Greece announced that it will miss the target for reducing its deficit this year, which will probably reach 8.5% from 7.6% of gross domestic product.
ECB/BoJ – Monetary policy decisions in the limelight
Thursday, the ECB will hold a very important meeting while its President will stand down after his eight-year mandate expires at the end of the month. During this meeting, several members will more likely call for a rate cut of 25 to 50 points. The interest rates slash could annihilate the previous two rate hikes and would bring the ECB’s key interest rate to 1.25% or even to an all-time low 1% while inflation in the euro zone hit 3%, well above the European Central Bank’s target of 2%. Furthermore, this week’s policy meeting will also give more details on the bond-buying program in the secondary market. This move, which was adopted in the spring of 2010, should slash the lending rate of the eurozone’s weakest countries but so far, it created resentment in Germany with the resignation of Bundesbank President Axel Weber as well as ECB’s chief economist, Jürgen Stark.
For this week, the should continue its downtrend to hit 1.3160 before a possible correction at 1.3540.
In Japan, the BoJ’s Tankan report showed a slight improvement of the business climate while markets anticipated even more positive data. Unlike the ECB, the Japanese central bank is not expected to take new measures during its meeting this week. The yen is still at risk as an intervention is very likely on levels inferior to 75.00 for the parity.
Swiss economy hurt by franc’s strength
The Swiss KOF barometer fell once again in September which marks a downtrend in the Swiss economy, mainly attributed to the franc’s strength. The minimum exchange rate set by the SNB at 1.2000 which should help exports will most certainly be under pressure this week if the ECB decides to slash its key interest rate. The Swiss National Bank might sustain the first blows from investors seeking security. From a technical point of view, should remain in the 0.9010/0.9110 area while volatility on the could increase if the 1.2110/1.20802 levels are tested.