Euro Down as ECB Cuts Rates to 1.5%, Leaves Door Open to Further Reductions and ’Non-Standard’ Measures

The euro remains under pressure on Thursday after the European Central Bank cut interest rates in line with expectations by 50 basis points to 1.50 percent at 7:45 ET. Furthermore, when you take into consideration the content of ECB President Jean-Claude Trichet’s subsequent comments at 8:30 ET, the outlook for the euro looks increasingly bearish from an interest rate expectation perspective. The ECB staff’s macroeconomic projections were revised down sharply from December and showed that they expect annual real GDP growth in the Euro-zone to fall within a range of -3.2 percent to -2.2 percent in 2009, but then pick up slightly to between -0.7 percent and +0.7 percent in 2010. Meanwhile, inflation projections were also revised down to reflect forecasts for annual HICP inflation to slow to between 0.1 percent and 0.7 percent in 2009, and rise slightly to between 0.6 percent and 1.4 percent in 2010. During the Q&A session, Trichet refused to call 1.50 percent the floor for interest rates, suggesting the ECB may cut rates further, but also indicated that he saw zero interest rates as being "inappropriate." The big question here was Trichet's allusion to the potential for quantitative easing, which he preferred to call “credit easing,” as he said that the central bank was studying "additional non-standard measures." Given the prospect of not only rate cuts from a traditional monetary policy perspective but also lower yields on government bonds in the Euro-zone presents potential for further euro declines. In the end, a region of support for EUR/USD between 1.2330 - 1.2500 serves as a make-or-break level for the pair, and traders should watch that carefully in light of the ECB’s dovish bias. 


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