Where is the ECB?

The Eurogroup and European Central Bank (ECB) seem to be continuing to spout the party line that price stability is the best gift the establishment can make to growth. This may mean they perceive no need for bank recapitalization in Europe, or that they think the European economy is sufficiently insulated (de-coupled) from the U.S. that recession is only a remote possibility.

As of late January, the ECB had not planned any rate cuts, although market commentators are nearly unanimous in their opinion it will have to retreat from this position. Similar to when the Fed was dragging its heels and refusing to cut rates for whining stock operators, the ECB is stubbornly resisting what it sees as inflationary damage to the economy for the sake of structural soundness. Observers worry that the ECB has its head in the sand.

For all anyone knows, the ECB may be correct believing that European banks do not need recapitalization. But is that really the most probable outcome? The euro is vulnerable to an ugly shock. Forex traders perceive it this way. It’s necessary to take a bearish dollar stance when we see U.S. bond yields falling for some months to come, but at the same time, it may pay to be vigilant for a euro downside breakout on fresh financial sector structural news.

It will be interesting to see if European banks can garner $69 billion from sovereign wealth funds in a matter of weeks, too. At a guess, lack of confidence in the management of the Eurozone financial sector will weigh on the euro, and we could see 1.4150 before we see 1.5150. If what we have is a double top, we could see a break of the neckline at 1.4311 to a 50 percent retracement at 1.4168 — if the ECB does have its head in the sand and if a banking sector crisis develops.