Euro Falls Ahead of ECB Annoucement


The ECB meets for its last policy decision this year. This meeting and to a greater extent the press conference that follows will likely be the driving force in the currency markets for the week and even the balance of the year. ECB President Draghi and Vice President Constancio have expressed heightened urgency to boost inflation as fast as possible, but have also discussed the need for the current programs to take effect.

So while the latest set of staff projections are likely to bring downward revisions to growth and inflation the ECB will likely remain on hold. Draghi will likely try and placate markets, however, by opening the door even wider to the prospect of corporate and sovereign bond purchases.

Economic data in the EU continues to disappoint. French ILO unemployment rose to 10.4% in Q3, up from 10.1% in the previous quarter. Mainland unemployment was up 77K over the quarter at 9.9%, versus 9.7% in Q2. The data ties in with purchasing managers readings that indicate contraction and overall weak growth.

Spanish refinancing costs fell amid hopes of ECB sovereign bond buying. Spain sold 1.270 billion of 10-year government bonds with a coupon of 2.75% at an average yield of 1.840%, down from 2.123% at the previous auction. The bid to cover ratio fell to 2.19. France sold 10-year bonds at just 0.76%. France sold 2.075 of 10-year bonds with a coupon of 1.75% at an average yield of 0.76%, down from 1.18% at the previous auction of the same paper on November 6. The bid to cover ratio was 2.23, up from 1.39 in November.

The EUR/USD hit a fresh low for the move ahead of the ECB announcement. The exchange rate sliced through support at 1.24 and is poised to test lower levels. The MACD (moving average convergence divergence) index generated a sell signal, where the spread (the 12-day moving average minus the 26-day moving average) crossed below the 9-day moving average of the spread.

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