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    European Session – ECB action exceeds expectations but euro rebounds after initial fall

    The European Central Bank surprised the markets today after announcing that not only was it reducing the deposit rate from -0.30% to -0.40%, but also boosting its monthly bond purchases by 20 billion euros to 80 billion, including investment grade non-bank corporate bonds in its asset purchase program and announcing 4 new long-term funding programs (TLTROs).  The main refinancing and the marginal lending facility rates were both reduced by 5 basis points to 0% and 0.25% respectively.

    The euro initially fell to 1.0821 versus the dollar in the initial reaction to the announcement (from around 1.0970 before), but later reversed these losses and rose to top 1.11.  It was one of the euro’s most volatile days in its history.  There was some disappointment for euro bears that Draghi pointed out that there were limits on how low negative interest rates could go; implying perhaps that the ECB might not be prepared to cut rates further.  There was also some disagreement among analysts as to what the ECB would realistically hope to achieve using such an unprecedented combination of unconventional tools as well as the risks this involved.

    It is also possible that the market might remain volatile in the coming days as it fully digests this major shift in ECB policy and as policymakers themselves seek to tweak the initial message.

    ECB action had a positive effect initially on risk assets as both European stocks as well as US stock index futures rose on the expectation of extra liquidity for global markets.  The S&P 500 index was trading above the key 2000 level in the US, while gold also climbed to $1267 per ounce following the announcement of additional liquidity injections.  Stocks fell back later but gold managed to keep its gains.

    Some profit-taking in oil hurt commodity-influenced currencies as the aussie fell to 0.7445 versus the greenback and the US dollar climbed back towards the 1.33 level versus the Canadian dollar.

    There was positive news out of the United States as weekly jobless claims fell to their lowest since October of last year.  Claims fell to 259 thousand compared to the previous week’s 278 thousand reading, showing the continuation of strong labor market conditions in the world’s largest economy.  Nevertheless the dollar fared poorly both against sterling – with cable rising to 1.4280 and the Swiss franc, as it fell to 98.63 centimes with the rising euro helping the franc higher.

    There was little news to expect for the remainder of the US session – or indeed for the rest of the trading week compared to the ECB’s big surprise today.  The Governor of the Bank of Canada would speak later in the day, giving him an opportunity to clarify the Bank’s decision to keep rates steady the previous day.

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