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ECB's New Policy Tool Slams Euro: EUR/USD Down to $1.29, EUR/JPY ¥129

ECB's New Policy Tool Slams Euro: EUR/USD Down to $1.29, EUR/JPY ¥129

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: EUR European Central Bank Rate Decision > Key Rate on Hold at 0.50%, Deposit Facility Rate on Hold at 0.00% > No Implementation of Negative Rates, but Introduction of “Forward Guidance” > EURUSD BEARISH

What was expected to be a quiet day was turned on its head after the European Central Bank made an unexpected pivot towards a more dovish stance, with the announcement that it would include “forward guidance” as part of its tool kit for communicating monetary policy to market participants.

Taking a page from the Federal Reserve’s playbook, forward guidance is intended to help guide policy expectations out on the distant horizon; and therefore ECB President Mario Draghi’s statement that interest rates will “stay low for an extended period” is seen as implicitly announcing that interest rates will remain low for the next several years.

While this is not surprising – the Euro-Zone remains in a recession, labor markets across the continent are in depression-like states, and the public financing holes in peripheral balance sheets have yet to be plugged – this new policy tool offers a near-term reason to see a weaker Euro.

EURUSD 1-minute Chart: July 4, 2013

ECBs_New_Policy_Tool_Slams_Euro_EURUSD_Down_to_129_EURJPY_129_body_Picture_1.png, ECB's New Policy Tool Slams Euro: EUR/USD Down to $1.29, EUR/JPY ¥129

Charts Created using Marketscopeprepared by Christopher Vecchio

While the Euro didn’t take a hit on the onset of the policy statement being released, once ECB President Draghi stepped up to the microphone, all bets were off. The EURUSD plunged from $1.2988 to as low as 1.2883 within 20-minutes of the presser beginning. Similarly rocked by the language on forward guidance, the EURJPY cratered from ¥129.64 to as low as 128.82. The EURUSD and EURJPY were trading at 1.2907 and 129.08, respectively, at the time this report was written.

Note: ECB President Mario Draghi’s press conference was ongoing at the time of publishing; this article may not contain the most up to date information upon consumption.

--- Written by Christopher Vecchio, Currency Analyst

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