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European Central Bank Holds Key Rate at 1.5 percent

European Central Bank Holds Key Rate at 1.5 percent

2011-10-06 13:35:00
Trang Nguyen,
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THE TAKEAWAY: European Central Bank Holds Key Rate at 1.5 percent > Speculation on additional monetary supply increased >Reactions in the Euro mixed

At the European Central Bank meeting today, the Governing Council decided to leave key interest rate unchanged at 1.5 percent for two consecutive months after lifting interest rate from 1.25 percent in July to curb inflation. ECB’s benchmark rate decision matched with the median projections from Bloomberg survey. Eleven of fifty two economists polled by Bloomberg expected an interest rate cut by at least a quarter-percentage point while the majority anticipated no change. While Eurozone has been struggling to boost regional economic growth and prevent debt crisis from spreading, its inflation remained very high. Economic activity in 17-nation region expanded merely 0.2 percent in the second quarter of this year compared to 0.8 percent in the first quarter. Regardless, latest data showed that the Eurozone’s consumer price index rose to 3 percent in September, well above the regional inflation rate target.

EUR/AUD 1-minute Chart: October 6, 2011

100611_European_central_bank_rate_decision_body_Picture_1.png, European Central Bank Holds Key Rate at 1.5 percent

Charts created using Strategy Trader– Prepared by Trang Nguyen

Intensified sovereign debt crisis in recent weeks and “particularly high uncertainty and downside risks” reinforces expectations of the benchmark rate cut and market participants even priced in an eighty-eight percent chance of a 50 basis point rate cut on Monday. Since the European Central bank announced to keep its key rate on hold, currency traders showed mixed reactions in the euro. As can be seen from the EUR/AUD 1-minute chart above, the EUR/AUD jumped approximate 80 pips from 1.3660 to 1.3740. The Relative Strength Indicator falling below 30 signaled overbought reactions regarding to the EUR/AUD pair. The single currency regained its footing against the aussie as investors have shifted to bet on additional quantitative easing to spur economic growth in Eurozone. Besides, the decision was released amid heightened speculation on ECB leaders’ moves to recapitalize banks to tame crisis, prompting foreign exchange trading crowd to cut their holdings on high-yield currencies.

EUR/USD 1-minute Chart: October 6, 2011

100611_European_central_bank_rate_decision_body_Picture_4.png, European Central Bank Holds Key Rate at 1.5 percent

Charts created using Strategy Trader– Prepared by Trang Nguyen

Currency traders’ reaction regarding to the EUR/USD was reversed to the EUR/AUD pair. After the ECB’s announcement, the euro relatively weakened versus the dollar. The currency pair dropped 45 basis points from 1.3310 to 1.3250. At the time this report was written, the euro is trading at 1.32550 dollars. Unless European leaders have a clear act to solve crisis that help scale back risk appetite, the greenback would still be the safe haven to monetary managers.

--- Written by Trang Nguyen, DailyFX Research Team for DailyFX.com

To contact Trang, email tnguyen@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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