After languishing quietly in Asian and early European session trade high beta currencies finally dipped lower in the wake of an IMF downgrade of global growth that put a damper on risk sentiment. The EURUSD which rallied as high as 1.2995 in late Asia, dropped like a stone at the start of EU dealing, hitting a low of 1.2925 as equities across the region turned negative.
In its nearly 100 page report, the IMF noted that I the global economy has “deteriorated”, growth projections have been “marked down” and that risk factors have become “more elevated”. As a result, the IMF now expects the global economy to grow 3.3% this year – down from an earlier prediction of 3.5%.
“To avoid a sharp downturn, it’s very clear what’s needed is that policymakers take the right decisions. So if you look at Europe, the eurozone now has put in place, in principle, an architecture which is very coherent, the problem is implementation and they really have to implement it, that’s the key,” said the IMF’s chief economist Olivier Blanchard.
Meanwhile in US the IMF focused on the upcoming â€œfiscal cliffâ€ as the US faces the problem of simultaneous budget cuts and higher taxes at the end of the year. The IMF urged lawmakers to avoid gridlock and come up with a compromise before the deadline kicks in.
“In the US we’re getting closer to this thing called a fiscal cliff, which would be a catastrophe if it happened that quickly. So here it’s clear that there has to be put in place a fiscal plan, not only for this year but for coming years, which is credible,” Mr Blanchard said.
The blunt language of the IMF may have taken market participants by surprise and risk appetite clearly deteriorated as the morning session progressed with EURUSD drifting lower towards the 1.2900 level while cable came within a few pips of the 1.6000 mark. Todayâ€™s visit by Angela Merkel could provide some relief to euro longs, but only if she signals some sort of softening stance on the countryâ€™s fiscal position. If Ms. Merkel simply reiterates her support for Greece to remain in the euro, but offers to fresh relief, the EURUSD could continue lower as global growth concerns dominate trade.