© Christian Lips
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We expect the Eurozone's economy to worsen, but only to a limited extent. We think the recession will hold on for the first quarter of 2013, however, we anticipate that there will be some stabilization during the current quarter or in the second half-year at the latest. Nevertheless, we are still closely watching the effects of the Cyprus bailout scheme, as we believe that plan A, which was first discussed, has most likely some negative impact on the consumer and business confidence. Moreover, it is expected that the investors will start to reallocate their portfolios and worried investors may probably switch to safe haven assets like German bunds. All in all, we assume that the current troubles with Cyprus will have some sustained negative influence on confidence among investors and bank clients, especially in Southern Europe.
The ECB has been holding its key interest rate at a record low of 0.75%. Do you expect the central bank to lower the interest rates even further given the recent negative data?
Probably the impact of the Cyprus bailout will force the ECB's policy makers to reconsider the appropriate interest rate. We saw some discussion about this topic already last month. The decision to hold on with the current interest rate level was not unanimous, thus we think this discussion will be brought back again. However, there are no signs that they will lower interest rates in April.
In addition to that, we expect that the central bankers will also monitor the economic developments after the Cyprus bailout. We are not quite sure about the repercussions of the current uncertainty surrounding Cyprus, but there will be the monitoring in place, and we will find out next month how deep this impact will be. We think this is a crucial point, which might also influence the ECB's interest rate decision.
While in the U.S. lowering the unemployment rate to 6.5% is the top priority for Ben Bernanke, why do you think that the record-high unemployment in the Eurozone is not being the focus of attention?
The high level of unemployment in the Eurozone at present is a result of the weak economic development due to austerity measures in many member countries. Economic growth and unemployment is part of the economic analysis. However, the ECB's point of view is that the current recession mainly reflects structural adjustments. Furthermore, the primary objective of the ECB is to ensure that price stability is maintained over the medium term. Only if there are no significant inflationary risks, the ECB has to underpin the European economic policy. Thus, the ECB's mandate contrasts with the Fed's multiple-objective mandate.
What is your forecast for EUR/USD, EUR/JPY for the end of April?
While we do expect an appreciation of the U.S. Dollar in the medium term due to the relative strength of the US economy, there should not be that much pressure on the Euro in the next weeks. Thus, our forecast for the end of April is 1.29 EUR/USD. The Yen has depreciated recently due to expected monetary policy change. Till the end of April 2013 we expect only a small change to 121.30 EUR/JPY as some of the expected monetary expansion is already priced in. However, there is a high uncertainty caused by the European debt crisis.