EURUSD is trading at historic lows – the lowest in almost a decade – after breaking the psychological level of 1.20. This may be only the starting point of a deeper and more prolonged depreciation of the euro towards 1.15. The two key elements behind the drop are the resurgence of the sovereign debt crisis and expectations that the European Central Bank will launch a policy easing program to avoid Japanese-style deflation in the euro area.
Once again, the ECB will have no choice other than to take the lead in order to reassure investors. This means implementing a sovereign bonds purchasing programme despite German reluctance. It may not be the best option to strengthen growth and reinforce inflation but it is the only option left.
The ECB may launch this programme as soon as January 22. Over the past few weeks, pressure has increased on the central bank after the publication of data confirming the increasing risk of deflation in the Eurozone. For the first time since 2009, year-on-year inflation turned negative, as measured by the December Eurozone CPI estimate, with much of the pressure coming from the 30% plunge in the oil price since Opec’s last meeting in November.
LINK - Saxo Bank