The euro depreciated vis-Ã -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2480 level and was capped around the $1.2665 level. As expected, the European Central Bank voted to decrease its main refinancing rate target by 50bps to 1.50% from 2.00%, the lowest level in the ECB€™s ten-year history. At the same time, the ECB released a grim set of economic forecasts. The ECB now sees inflation remaining below the ECB€™s target for the next eighteen months and this suggests more rate cuts will follow. There is also a significant chance the ECB will have to follow the Fed€™s and BoE€™s lead by conducting massive asset-purchasing programs to steer market rates towards 0%. One major difficulty the ECB will face is the lack of a single eurozone-wide bond market. ECB policymakers who will conduct the probable massive credit easing or quantitative easing operation must decide which countries€™ assets to purchase in the primary and secondary markets, a decision that will invariably lead to criticism. Some eurozone countries have recently had their credit ratings downgraded and this will render the ECB€™s operations that much more difficult. ECB President Trichet today report EMU-16 gross domestic product may contract in 2010. Data released in the eurozone today saw EMU-15 gross domestic product tumble 1.5% q/q and 1.3% y/y. Additionally, French January producer price inflation was off 2.0% m/m and 2.7% y/y. Moreover, German January retail sales fell 0.6% m/m and 1.3% y/y. In U.S. news, data released in the U.S. today saw weekly initial jobless claims decline 31,000 to 639,000 last week while continuing jobless claims were off 14,000 to 5.106 million. All eyes will be focused on tomorrow€™s U.S. February non-farm payrolls report with most economists preparing for a very weak report, especially after ADP reported 697,000 private sector job losses last month. Other data released today saw Q4 non-farm productivity off 0.4% from +2.2% in Q3 while unit labour costs grew 5.7% from 3.5% in Q3. Nonetheless, productivity had its best annual result in four years last year. The Federal Reserve released its Beige Book yesterday and it indicated the economic contraction worsened in January and March with no improvement expected in the short-term. Euro bids are cited around the US$ 1.2385 level.
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