With speculation regarding the European Central Bank decision looming over the market tonight, the euro continues to remain relatively directionless in the afternoon trade.  But, there won’t be much to expect when it comes to decision time  - with a couple major reasons against another rate cut.  The absence of a reduction in rates could help the single currency continue on its currently upward path.

For one, European Central Bank President Mario Draghi is unlikely to reduce rates further given the success of December’s LTRO attempt.  The 3-year lending facility supported by the European Central Bank did the job – lowering the rates of periphery economies that were experiencing rising bond yields (or higher debt costs).  European countries, at the facility inception, took up to approximately 490 billion euros, which additionally lowering yields for economies like Spain and Italy.  Since the December program, yield and yield spreads in both countries have declined, with Spanish 10-year benchmarks falling to as low as 4.8% from as high as 6.7%.  A second LTRO tranche is expected to be tallied on February 29th, making it highly unlikely that the central bank will take action before then.

Secondly, European fundamentals, although still relatively under the weather, have improved a bit.  Just last month, it was revealed that business and consumer confidence had improved in the month in January.  German business confidence jumped to a five month high – lending to speculation that businesses are likely to ramp up production on expectations of future improvements.  Manufacturing has also improved, with the flash estimate rising back into expansionary territory.  Any move by the central bank to raise rates at this point would indefinitely lend to a potential choking of new recovery style growth.

And last but not least, inflationary pressures continue to remain elevated.  Granted they are not as high as other economies in the industrialized sector, but they are high enough to keep policymakers on the side lines.  As of the latest round of inflationary data, consumer price inflation in Europe was as high as 2.7%.  This is the highest reading in almost 2 years, and tops when it comes to ECB inflation benchmarks.  Although Mario Draghi and company remain concerned over the economy – they are unlikely to cut rates at a point when inflation is still pretty high.

Although European policymakers will be unlikely to raise rates at this point, there is still a belief that ECB President Draghi will remain alert and vigilant to any unwelcomed developments in the Eurozone.

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