ECB cut interest rates to 0.25% sending EUR spiraling lower against all major currencies

Tom Tong08/Nov/2013Currency Updates

GBP

Fairly uneventful day for the pound yesterday. The leverage taken from euro woes is prompting a rally and London opening sees sterling within a whisker of quarterly highs. On the other hand, the pound was down against the dollar, as initial perceptions of stronger than forecasted data from the US prompted a dollar rally. The BOE meeting and statement was a fairly mundane affair with nothing changing. Interest rates will remain at 0.5% and QE topped at £375bn. Inevitably post BOE meeting prompting the usual market chatter of MPC sentiment and when any change is likely to happen. Majority in the market now looking to next year for the earliest possible change in sentiment amongst the MPC. Wider U.K prospects and data still looking rosy.

No data out of the U.K today.

EUR

Torrid time for the euro yesterday. The majority of the ECB have taken a incredibly dovish view over the economic situation, leading in a cut in interest rates to 0.25%. This was widely unexpected with the majority in the market expecting the ECB to wait until December.

Naturally the euro crashed through the floor. This is the biggest fall against the greenback and London trading will open this morning with the Euro at 11-month low against the dollar. Also massive crash against sterling and overall down against its most traded pairs with the euro index taking an absolute hammering. Conversely, euro stocks rocketed hitting a 5-year high. Many currency investors caught slipping, compared to investors in stocks experiencing widespread glee.

The move in interest rates resulted form last month’s flash inflation reading showing a risk of deflation. Inflation had fell at less than half the ECB’s target. This caused alarm with widespread debate over how the ECB intended to respond. Realistically Draghi was faced with three options – cut rates, increased forward guidance or a fresh injection of liquidity to EU banks. He chose the most extreme measure, duly cutting rates to record lows and agreeing that the ECB will continue to provide potentially unlimited quantities of cheap loans to banks until the 2nd half of 2015 with the aim of increasing borrowing in the eurozone and stimulating growth. At the press conference, Mario Draghi was faced with a barrage of questionsto which he provided concise answers – if inflation continues to fall he has other options. This includes charging lenders to hold funds at the central bank and increase levels of liquidity to EU banks. Furthermore, the ECB could further cut rates. Draghi was also keen to counted comments that the euro is now a mirror of Japan, which has a notorious history of deflation.

The markets will still be reeling today digesting what the rate cute means for future euro prospects. For the meantime its going to be a a tough time for the euro. Data releases of note include French and German import and export figures and trade balance.

USD

Huge trading volumes and movement for the greenback yesterday with spectacular gains against the euro and rises against sterling. Initial jobless claims were finally released after the partial shutdown closing all agencies and slowing data releases. The headline figures are flattering with solid data recorded, however ultimately the figures show little improvement. This resulting in mixed reviews amongst investors towards the U.S recovery and wider economic situation.

Annualized growth looked strong coming in at 2.8%. However, the problem is income gains remain minimal restricting consumer spending and giving the economy a glass ceiling for big gains. Furthermore, these figures do not reflect how the shutdown affected the U.S as they are for the weeks prior. Right now the FED wants evidence of strong growth in employment to buoy consumer incomes and support demand. Today will give them the best chance to have this, with NFP due for release midday. This is the penultimate NFP release for this year and if the data is surprising, the dollar may pivot. The FED is likely to ignore the October figures and instead wait for the November report, prior to furthering discussion over the timescale and structure of a tapering of QE.

Big data with NFP coming in at midday. Set to be another eventful day for the dollar.

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Written by Tom Tong

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