Forex Flash: ECB rate cut still likely on risk of a return to recession – TD Securities

FXstreet.com (Barcelona) - TD Securities analysts suspect that the ECB will eventually cut rates further, despite showing no hurries, as the ongoing extreme weakness in the hard data suggests that further stimulus will be needed to get the economy on a sustainable footing. "This is not to fight a crisis, but to merely put more inertia into the recovery", wrote Richard Kelly, Head of European Rates and FX Research at TD Securities.

Kelly and his team think the 2.09% yield on Spanish 2-year debt seen by the end of the ECB press conference is close to its fair value range of 1.50-2.00%, "so this is close to as good as it will get in our opinion, and so we would expect that a rate cut, both refi and deposit, is still a strong possibility for March". "This will require some further weakness in the data in the coming months", he continued, "Q4 GDP from Germany next week should confirm a contraction in Q4 that they will slowly dig out of and France seems the most likely to see the data underperform into Q1". The conclusion is that instead of a strong rebound, data is showing signs of a return to recession, pointing to a real need of a rate cut, with the only question being when.