Euro rallies after ECB Cuts – Paxforex

Yesterday the European Central Bank behind President Mario Draghi has failed to accomplish what many have hoped for; a lower Euro. After his press conference during May’s ECB meeting where the central bank did not act Draghi communicated to the markets that the ECB would feel comfortable to act during its June meeting in order to combat deflationary pressures.

The Euro sold-off over 400 pips and yesterday the ECB did act as it cut its interest rate by 10 basis points from the previous all-time record low of 0.25% to 0.15%. The markets priced in a bigger 15 basis point interest rate cut and were dealt their smaller of two big disappointments. The marginal lending facility rate was cut from 0.75% to 0.40% against estimates for a cut to 0.60%; traders largely ignored this surprise.

Finally the long awaited negative deposit rate was delivered as the ECB cut it by 10 basis points to -0.10%. Data out of countries who experimented with this move shows no positive impact with only downside risks which makes this long awaited move a non-event. Overall deflationary pressures continue to mount and forex traders expected a lot more out of the ECB than the cuts in rates across the board.

The biggest disappointment came from the lack of a stimulus package which is actually a long-term positive development and intelligent market participants welcomed the lack of a stimulus. The ECB maintained its sole position among the top four central banks in the world, the European Central Bank, the Bank of England, the Bank of Japan and the US Federal Reserve, in its independence as it does not create monetary policy action based on market or political pressure.

After a brief but sharp drop in the EURUSD less than 24 hours later this currency pair trades higher than it did before the rate cuts were announced yesterday. Draghi did acknowledge that the ECB is not doen yet which signal more widespread issues in the Eurozone economy while an expected disappointment in today’s US non-farm payroll report could rally the EURUSD above the 1.3700 mark.

Written by Paxforex