Forex Flash: Euro tumbles following Draghi commentary – BTMU (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that the Euro sold off yesterday in response to comments from the ECB President Draghi indicating that a ´wide discussion´had taken place at the policy meeting in regard to whether to leave the key official rate unchanged and a decision “by consensus” was reached to leave rates unchanged.

Halpenny writes that President Draghi also acknowledged that cutting the deposit rate into negative territory was also discussed . He feels that these comments, coupled with a substantial cut in growth projections and a 2014 inflation forecast of just 1.4% are strong signals of where the true bias lies in terms of future rate moves.

Draghi cited inflation risks as being balanced but Halpenny believes that this is hardly credible. He feels that a shift in bias in January and a rate cut in February is now a very plausible scenario. Elsewhere, the Bundesbank has just released its own projections and has slashed its growth forecast for Germany next year from 1.6% made in June to just 0.4%. Germany is being increasingly impacted by the austerity drive across the Eurozone and with more coming for 2013, the ECB is likely to act.

Halpenny feels that a modest cut by the ECB is unlikely to impact the Euro much, but it nonetheless will diminish considerably the prospect of EUR/USD advancing much above the 1.3000 level in circumstances of more favourable financial market conditions. He finishes by writing, “But even that is not assured with the Spanish 10-year sovereign spread over Germany some 32 basis points wider this week. We continue to expect Euro negatives to be offset by dollar negatives leaving EUR/USD range-bound over the coming months.”