European Central Bank President Mario Draghi signalled it was willing to take further action to prop up the euro zone economy in a speech to the EU parliament on Thursday, saying risks had grown and that the ECB was aware of growing banking problems.
Highlighting action the ECB took on Wednesday with other major central banks to provide dollar liquidity that was reminiscent of the 2008 financial crisis, Draghi said the bank would ensure inflation did not undershoot its target as well as exceed it.
Markets read that and the warning of growing downside risks to the economic outlook as pointing to a second cut in official interest rates in as many months at next week's ECB policy meeting, pushing the euro to a session low.
The ECB's monetary policy is constantly guided by the goal of maintaining price stability in the euro area over the medium term -- and this applies to price stability in both directions, Draghi said.
Downside risks to the economic outlook have increased.
Draghi stressed that he was speaking in the ECB's pre-meeting period and that nothing he said should be interpreted in terms of future policy decisions.
But many investors read the comments as upping the chances for a rate cut next week over which analysts have been divided.
These comments do open up the chance for a rate cut, said Jeremy Stretch, head of currency strategy at CIBC World Markets.
Next week we will have the ECB staff forecasts and we will surely get a substantial downgrade to growth and inflation forecasts. All of which will lead to expectations of a rate cut by the ECB and extension of non-standard measures. The markets will be very frustrated if they don't get that next week.
As European policymakers move into what one senior official has said are a crucial 10 days in which they can save the euro, Draghi appealed for a comprehensive deepening of fiscal ties.
What I believe our economic and monetary union needs is a new fiscal compact - a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made, he said.
We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility.
Germany and France have promised to come up with proposals for greater fiscal integration of the euro zone for a summit on December 9, a day after the ECB next meets.
(Reporting by Sakari Suoninen and Anirban Nag; writing by Patrick Graham)