With ECB President Draghi delivering his final press conference of the year, European monetary policy was the main focus this morning. Based on the sell-off in EUR/USD, it is clear that investors didn’t like what Draghi had to say. Interest rates were left unchanged at 0.75% but the euro sold off because the European Central Bank downgraded their 2012 and 2013 growth forecasts along with next year’s inflation estimates and warned that the risks are to the downside. The German stock market, which is trading at its highest level in 4 years is performing well but like all of other central banks who met this week, Draghi said the U.S. Fiscal Cliff poses an unknown risk. His grim forecast for economic weakness into next year and his admission that the central bank had a “wide discussion” on interest rates drove EUR/USD sharply lower even though the final decision was to leave rates unchanged. While the ECB did not alter monetary policy, their decision to continue the full allotment of their main refinancing operation at a fixed rate and their downgraded GDP and Inflation forecasts was enough to remind investors that even with the recent stability in European assets, ECB monetary policy is extremely accommodative.

There is light at the end of the tunnel however because Draghi believes that we should see the start of a recovery in the second half of 2013. A lot can happen between now and investors ignored this forecast as the Fiscal Cliff or greater austerity in the Eurozone may throw it off course. In the near term, we know that the ECB is still very concerned about the outlook for the Eurozone economy and will continue to practice easy monetary policy. While we don’t think ECB President Draghi has completely killed the rally in EUR/USD, the currency pair has had a very nice run over the past few weeks and a correction is not unusual -there is support in EUR/USD at 1.30 and 1.2880.

Meanwhile the U.S. dollar received no boost from lower than expected weekly jobless claims. The effects of Hurricane Sandy continue to fade with claims dropping to 370K from 395K the previous week. Non-farm payrolls are due for release tomorrow and if there is a major pullback in job growth, this improvement in claims will ease some of the concern. Challenger Grey & Christmas reported a 34.4% increase in layoffs in November, which is consistent with the weakness reported in other labor market surveys. Overall, there is a good chance that November payrolls were 50% less than October’s but a snapback is expected the following month.

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