Talking Points

  • Euro: S&P Warns Of Double-Dip Recession, ECB To Hold Rates

The EUR/USD slipped to a low of 1.4384 on Tuesday as uncertainties surrounding the euro-area weighed down on market sentiment, and the short-term reversal may accelerate in the days ahead as the sovereign debt crisis comes back into focus. Indeed, Standard and Poor's warned of a double-dip recession in Europe as the region copes with a slowing recovery, and sees the European Central Bank keeping the benchmark interest rate at 1.50% until the spring of 2012 in an effort to shore up the real economy.

At the same time, market participants are floating the idea that the ECB will adopt more unconventional policy tools given the ongoing turmoil with the financial system, and there seems to be an increased reliance on the central bank to address the risks for the region as the EU struggles to restore investor confidence. As ECB President Jean-Claude Trichet softens his hawkish tone for monetary, market participants are pricing a 25bp rate cut for the next 12-months according to Credit Suisse overnight index swaps, and a shift in monetary policy is likely to impede on the single-currency as the central bank continues to delay its exit strategy. In turn, the EUR/USD should continue to consolidate in the days ahead, and the pair may trend sideways over the near-term as investors weigh the prospects for future policy.