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Decision Time for the European Central Bank

Wednesday, 2 Nov 2011 | 2:30 PM ET
Mike Kemp | Getty Images

To cut or not to cut? The new president of the European Central Bank will make a decision sure to move the euro on Thursday.

Mario Draghi, the European Central Bank's new president, has a sea of troubles to take arms against. (Sorry, Shakespeare.) But whether he will actually wield the knife on interest rates at the bank's Thursday meeting is unclear.

Mark McCormick, a currency strategist at Brown Brothers Harriman, expects the ECB to leave rates unchanged, but signal a rate cut in December. "Draghi may not want to take any risks before his inflation fighting credentials are established," McCormick wrote in a note to clients, particularly since two hawkish German officials recently resigned from the bank.

Kathy Lien, director of global research and analysis at GFT Forex, argues that "removing the 50bp of tightening by Trichet earlier this year is not only needed but would be a sign that the new ECB head will be tackling the crisis head on in a decisive and aggressive manner." But such a move, she said, would "dig a knife into the heart of the euro" as investors lose yet another reason to hold the single currency.

Either way, Lien says, the euro isn't likely to fare well, what with the stream of downbeat economic data from the euro zone. Today alone, we got word that manufacturing unexpectedly contracted in October.

Be careful.

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