Fundamental Headlines

Dollar, Treasuries Gain Before Obama Speech – Bloomberg

OECD Cuts Global Growth Forecast – Financial Times

Fitch Warns of Downgrades for China, Japan – Reuters

ECB Lowers Growth Forecast – WSJ

Fed Prepares to Act – WSJ

European Session Summary

The shift to risk-aversion that began in the Asian session and the first half of the European session continued ahead of North American trading following the European Central Bank rate decision. The European Central Bank held the key overnight rate at 1.50 percent, as expected, for the third consecutive month. This past July, the central bank raised rates back to 1.50 percent for the first time since March 2009. Considering this move was relatively priced into Euro-based pairs, it was President Jean-Claude Trichet’s commentary following the rate decision that sunk the Euro across the board.

Unlike at other press conferences following the rate decision, in which President Trichet had maintained a cautiously hawkish and optimistic outlook on the Euro-zone economy, the European Central Bank’s top policymaker employed a much more dovish tone at the meeting on Thursday.

In regards to monetary policy, President Trichet said that the central bank expects “euro area economy to grow moderately, subject to particularly high uncertainty and intensified downside risks. At the same time, short-term interest rates are low. While our monetary policy stance remains accommodative, some financing conditions have tightened.” The dovish monetary policy outlook was supported by the fact that the “Governing Council views the risks to the medium-term outlook for price developments as being broadly balanced.”

EUR/USD 1-minute Chart: September 8, 2011

Euro_Sinks_on_Trichets_Dovish_Commentary_at_ECB_Press_Conference_body_Picture_1.png, Euro Sinks on Trichet's Dovish Commentary at ECB Press Conference

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Overall, the U.S. Dollar was bid higher against the Euro by approximately 60-pips, at the time this report was written. The pair traded over 100-pips lower on the initial reaction to European Central Bank President Trichet’s commentary, though rebounded part-way through his press conference amid sharp rhetoric defending the central bank’s decisions.

President Trichet also made the following commentary on the Euro-zone’s current conditions:

  • “We stand ready to provide liquidity as we have done in the past, taking into account the need for the banking sector.”
  • “There’s no liquidity issue for the banking sector as a whole.”
  • “If I look at eligible collateral European banks have, and what is provided, you see that there is a possibility to obtain liquidity that is a multiple of what we supply.”
  • “We’re very keen through these non-standard measures to provide liquidity.”

Thus far, on Thursday, the Dow Jones FXCM Dollar Index is slightly higher, trading at 9584.03, at the time this report was written, after opening at 9572.93. The index has traded in a narrow range today, with the high at 9608.18 and the low at 9561.07.

24-Hour Price Action

Euro_Sinks_on_Trichets_Dovish_Commentary_at_ECB_Press_Conference_body_Picture_4.png, Euro Sinks on Trichet's Dovish Commentary at ECB Press Conference

Euro_Sinks_on_Trichets_Dovish_Commentary_at_ECB_Press_Conference_body_Picture_5.png, Euro Sinks on Trichet's Dovish Commentary at ECB Press Conference

Key Levels: 13:15 GMT

Euro_Sinks_on_Trichets_Dovish_Commentary_at_ECB_Press_Conference_body_Picture_6.png, Euro Sinks on Trichet's Dovish Commentary at ECB Press Conference

Written by Christopher Vecchio, Currency Analyst

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Follow Christopher Vecchio on Twitter: @CVecchioFX