As long as European governments continue with plans to raise taxes and slash budgets, consumer confidence is likely to remain subdued. This has created a prolonged need for central bank stimulus measures which limit the outlook for the euro currency. The ECB has already reduced its benchmark interest rates to record lows of 0.5%, so while an additional rate cut is possible, there is little room for the central bank to do so.
One strategy that has been floated is the implementation of negative deposit rates paid by the ECB for money held at the central bank. Negative deposit rates would encourage banks to lend funds, rather than choosing to hold that money at the ECB. On the downside, this would limit the ability of those banks to generate profits. This strategy would also put renewed selling pressure on the euro.
So, while the ECB is still more likely to enact measures to promote lending for small and mid-sized businesses, hopefully installing a ceiling on the rising unemployment rate, the broader data continue to show deteriorating trends. The eurozone continues to lack evidence of a stable recovery when compared to its U.S. counterparts. This creates a scenario that favors selling euro-denominated assets, and buying assets denominated in the safe-haven U.S. dollar.
Disclosure: At the time of publication the author had no position in any of the stocks mentioned.This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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