Today’s trading session brought a big surprise for Forex traders: the European Central Bank cut its interest rate. As one could expect, the euro slumped after the news. Yet it looks like the drop was overdone as the currency is recovering right now.
The ECB cut its key interest rate (the interest rate on the main refinancing operations) by 25 basis points to 0.25 percent and the rate on the marginal lending facility by 25 basis points to 0.75 percent. It was a huge shock to the market as no change to policy was expected. President Mario Draghi said in the statement after the decision:
These decisions are in line with our forward guidance of July 2013, given the latest indications of further diminishing underlying price pressures in the euro area over the medium term, starting from currently low annual inflation rates of below 1%. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued.
Furthermore, Draghi reiterated the pledge to keep monetary policy extremely accommodative for a long time:
The Governing Council reviewed the forward guidance provided in July and confirmed that it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation continues to be based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics.
Overall, the statement was surprisingly dovish, making the euro very weak.
EUR/USD was down from 1.3511 to 1.3295, but rebounded to 1.3377 as of 16:10 GMT today. EUR/JPY slumped from 133.29 to 132.45, reaching the low of 131.88 intraday. EUR/GBP traded at 0.8337 after tumbling from 0.8401 to 0.8298, the lowest level since January 17.
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