The euro shrugged off a spate of disappointing economic releases and instead continued its rally throughout the US trading session thanks to unexpectedly aggressive monetary policy actions by the Federal Reserve. Looking at the data on hand, the Euro-zone’s composite measure of manufacturing and services sector activity fell below 50 – signaling a contraction in business activity – for the seventh straight month as PMI tumbled to a record low of 38.3. The data suggests that the recession plaguing the region will linger as we enter 2009, but will the European Central Bank continue to cut rates? Last week, ECB Governing Council member Axel Weber indicated that he didn’t want the central bank to cut rates any lower than 2.00 percent, but with the ECB’s benchmark rate already at a historically low 2.50 percent, this doesn’t leave much room for maneuver from a traditional monetary policy perspective. An upcoming release from the Euro-zone may help determine if the ECB will use what few options they have in January, as Wednesday’s CPI report is anticipated to show that inflation pressures fell significantly during November. Indeed, CPI is projected to drop 0.5 percent from the month earlier, which may drag the annual rate down to a 1-year low of 2.1 percent from 3.2 percent. Such a decline would add to speculation that the ECB will continue cutting rates, and could weigh on the euro. However, if we see that CPI does not fall in line with expectations, the euro could rally as traders will speculate that the ECB will stop short of cutting rates again in January in order to await confirmation of easing price pressures. From a technical perspective, a long-term trendline that supported the EUR/USD rally from 2002-2008 now serves as resistance at approximately 1.4150. Thus, the pair may be more inclined to pull back from Tuesday’s highs through the end of the week.

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