EURUSD Falls Sharply After ECB Cuts Funding to Some Greek Banks

The Euro was rebounding steadily once European trading opened this morning but with tensions high, the market has been primed to move quickly. Indeed, the uncertain investment horizon has allowed “headline trading” to sink back in, an atmosphere reminiscent of October and November 2011. This results in immense volatility. One of these events occurred this morning: the European Central Bank announced it would cease monetary operations with several Greek banks.

At the Monetary Policy Conference in Frankfurt, alongside the decision to stop operations with undercapitalized Greek banks, it would complete a comprehensive review of its policy tools by July but at present time, it would not be implementing any new liquidity measures. The report, broke first by Reuters, cited two ECB officials that said the ECB would stick to its current policy stance during its review period. In short, this means that another longer-term refinancing operation (LTRO) is off the table for at least two-months.

EURUSD 1-minute Chart: May 16, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

Immediately on the news, the US Dollar rallied across the board while the Euro fell, sinking the EURUSD from 1.2742 to as low as 1.2688 in just two minutes. The EURUSD has rebounded, trading back to 1.2722 at the time this report was written. The EURJPY also fell, trading lower by approximately 20-pips. The high beta currencies – very sensitive to liquidity developments – were hit hard as well, with the AUDUSD plummeting from 0.9945 to as low as 0.9912.

--- Written by Christopher Vecchio, Currency Analyst

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