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Euro Collapses After European Central Bank Cuts Rates

Euro Collapses After European Central Bank Cuts Rates

2011-12-08 14:50:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Fundamental Headlines

Franco-British Fear of 1990 Reunification Coming True – Bloomberg

Jobless Claims in U.S. at Lowest in Nine Months – Bloomberg

ECB Cool on More Bond Buying, Lending to IMF – Reuters

ECB Cuts Rates as France, Germany Press for EU Deal – Reuters

CBOE: MF Global’s European Exposure Apparent since May – WSJ

European Session Summary

The European Central Bank rate decision provided the spark markets were looking for. After consolidating for the better part of the past week, the major currencies were positioned for a major move coming into the end of the week, especially considering the heavy volume of market moving events on the docket.

In line with the expectation of some exceptional volatility on Thursday, the ECB rate decision provided just that. The Governing Council voted to cut the central bank’s key interest rate to 1.00 percent from 1.25 percent, good for a 25-basis point rate cut. Upon the release of this decision, markets rallied in hand with a U.S. Dollar sell-off, pushing the majors through significant levels of resistance established this past week. However, despite the 60-pip rally in the EUR/USD and 80-pip rally in the AUD/USD, risk-appetite was short-lived once President Mario Draghi’s press conference started.

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

Euro_Collapses_After_European_Central_Bank_Cuts_Rates_body_Picture_10.png, Euro Collapses After European Central Bank Cuts Rates

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Immediately, it became apparent to market participants that the Governing Council did not yield the desired results. Although the 25-bps rate cut was progressive, it fell short of the 50-bps cut some were calling for. More importantly, in regards to quantitative easing, Draghi noted that “We have a treaty, and the treaty states what our primary mandate is, which is maintaining price stability. Also it says no monetary financing.” This sign that the ECB will not go ahead with aggressive bond purchases was the cue markets were looking for to establish a direction – down.

Following the press conference, the EUR/USD traded over 100-pips lower, from just below 1.3460 to 1.3336, at the time this report was written. Similar price action was exhibited across other major currencies, with the U.S. Dollar outperforming the majors by a wide margin. The only currency to have a stronger day was the Japanese Yen, which was curiously the best performer leading into the ECB rate decision.

Now that the ECB rate decision is out of the way and it is evident that the central bank will not step into secondary markets with fervor until fiscal reforms are enacted, all eyes are on the Euro-zone summit. I maintain my position that the combined effect of recent developments out of the Euro-zone suggests that another disappointing weekend is ahead, filled with vague promises of solving the crisis without offering any tangible solutions that will actually be implemented to solve the issues at hand – not dissimilar from the October Euro-zone summit.

24-Hour Price Action

Euro_Collapses_After_European_Central_Bank_Cuts_Rates_body_Picture_1.png, Euro Collapses After European Central Bank Cuts RatesEuro_Collapses_After_European_Central_Bank_Cuts_Rates_body_Picture_7.png, Euro Collapses After European Central Bank Cuts Rates

Key Levels: 13:50 GMT

Euro_Collapses_After_European_Central_Bank_Cuts_Rates_body_Picture_4.png, Euro Collapses After European Central Bank Cuts Rates

Thus far, on Thursday, the Dow Jones FXCM Dollar Index is slightly higher, trading at 9865.57, at the time this report was written, after opening at 9854.94. The index has traded mostly lower, with the high at 9870.40 and the low at 9790.26.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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