The Euro Is Dropping Fast On Hopes That The ECB Will Put A 'Bandaid On A Shotgun Wound'

Matthew Boesler

The euro is trading below $1.35 this morning, down more than 2% from the high above $1.38 made last Friday.

In October, the euro has become one of the hottest topics on Wall Street, as its persistent strength over the past few month has defied expectations.

In the last few days, however, the currency has started sinking, and yesterday, it got slammed after the release of weak inflation and unemployment data in Europe, something a growing number of analysts now expect will prompt a 25 basis-points cut to the European Central Bank's benchmark refinancing rate — which currently stands at 0.5% — when the Governing Council meets next week.

"Yesterday's shock has prompted a flurry of rate cut forecasts from ourselves as well as everyone else," says Kit Juckes, global strategist at Société Générale. "If the ECB wants to avoid the further Japanification of the Euro Area, they need to do everything they can to ease monetary policy."

However, Juckes doesn't believe 25 basis points are worth much in economic terms.

"There are just a couple of problems," he says. "Firstly that the best policies (massive open-ended QE and FX intervention) are ruled out by the architects of Europe. And secondly that since my Taylor Rule for Euro rates suggests they should be at -2% today, a 25bp rate cut will be like sticking a bandaid on a gunshot wound."

See Also:

MORE ... The Japanification of Europe in three charts