Oct 7, 2012

Euro Exchange Rate Forecast

The European Central Bank (ECB) left interest rates unchanged at 0.75% at its October meeting. With much
attention focused on the ECB’s new sovereign bond buying scheme launched last month – Outright Monetary Transactions (OMTs) – ECB President Mario Draghi was at pains to stress the importance of the conditionally element. The ECB will activate the programme only after governments commit to strict fiscal consolidation and structural reform plans. Crucially, it will halt the programme if fiscal plans are subject to review and exit the programme if governments fail to fulfil their fiscal promises. As hoped, the OMT had a quiet but good start. Though it remains clientless, its mere announcement helped to reduce sovereign borrowing costs for the likes of Spain and Italy as markets acknowledge the potential of the scheme. But
overall economic conditions in the monetary block remain poor. Recent survey data indicate that the labour market and business conditions will remain challenging given the continued slowdown in economic activity as both domestic and global demand remain weak. Worryingly, with the Eurozone almost certainly in recession, more austerity is on its way.

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