Summary Outlook:
On Thursday, January 15 at 0745ET/1245GMT, the ECB will announce its decision on interest rates. We expect the ECB to cut rates by 1/2% from 2.50% to 2.00%, which is also the market consensus. However, the potential outcomes span the range from steady rates to a 1.0% cut, and we think the risks are skewed to the downside, meaning the ECB cuts more aggressively than expected. The economic outlook certainly favors aggressive easing (see below). Another potential outcome is that the ECB cuts by 50 bps now and Trichet, in his 0830ET/1330GMT press conference, then indicates further cuts may be needed. We foresee EUR weakness regardless of the outcome, as less easing, which may prompt an initial bounce, will be seen as dooming the European outlook even further, while more aggressive easing will be seen as an acknowledgement of the ever-weakening outlook.