The ECB rate decision will be announced 15 January at 12:45 PM GMT (11:45 PM in Canberra), and at this time the forex trading market has priced into the Euro currency crosses a 50bps reduction in refi rates to 2.0% from the current level of 2.5%.

The Eurozone-wide consumer price index printed 1.6% y/y in December, with producer prices registering 3.3%. As price stability (the control of both inflation and deflation to a rate of just below 2%) is the ECB’s only mandate (as opposed to the U.S. Federal Reserve’s dual mandate of price stability and maximum employment), this gives the governing council all the reason necessary to slash rates further.

In the opinion of Dominique Strauss-Kahn, managing director of the International Monetary Fund, the ECB and associated western European governments are “behind the curve” in supporting the Eurozone’s member economies. While this has been partially addressed by the recent German economic stimulus plan and others, in his opinion more action will be needed to combat what is promising to be a long and severe European recession in 2009.

With the ECB’s earned reputation for not catering to the whims of financial markets, however, a smaller rate cut is also possible. Recent comments by members of the governing council have emphasized that the 175bps of rate cuts already enacted since October have not been fully transmitted to credit markets, and that other actions rather than additional cuts may be necessary to accomplish this goal. In the ECB’s version of central bank cant, this translates into the potential for no cut in January, a possibility highlighted by the fact that the next meeting is only three weeks away, and fundamental data released during that time could offer council members a clearer picture of the current economic situation in the Eurozone.

Balancing this is the grim picture that has already been painted. Fundamental data from the Eurozone is not significantly better than that from the U.S. or U.K., with unemployment at 7.8%, business and consumer confidence reaching record lows and continuing to slide, and December PMI printing at 33.9 for manufacturing and 42.1 for services.

More significantly, the bear side of the ECB’s current staff projection calls for a −1.0% contraction in Eurozone GDP in 2009. Other economists, however, forecast a much sharper recession, with analysts at Deutsche Bank and Bank of America projecting a drop of as much as −2.5%.

For forex trading purposes, traders are advised that EUR/CHF has recently responded to safe-haven flows into the franc, and has fallen into the lower 1.4800 area, the bearish edge of its current volatile range with resistance at 1.5150. EUR/GBP remains in elevated territory after its unsuccessful assault on parity, and with so much weakness already priced into the pound, a consolidation is likely although an extension of the reversal cannot be ruled out should the market disagree with the ECB decision. After mid-December’s spike to 1.4719 and bounce from resistance at the 200-MA, best seen on daily charts, EUR/USD entered a down-trending price channel and remains within it despite spikes through its boundaries, as shown below: