EURUSD Drops as ECB Paves Way for Rate Cut and QE Restart
- ECB changes forward guidance towards easing, rate cut warranted in September
- New round of bond purchases will be announced
- Tiered rates may be introduced to mitigate negative rate impact on banks
EURUSD saw some volatility prior to the announcement as the pair spiked to 1.1149 before dropping back to around 1.1120 as the ECB kept rates unchanged but signalled further monetary stimulus to come in September.
A key takeaway from this meeting are the changein the Central Bank’s forward guidance, shifting from keeping rates at current levels to keeping them at current or lower levels until mid-2020, signalling that they are prepared to lower rates in the September meeting, possibly taking the deposit rate 10 bps lower to -0.5%. Analyst views and expectations for this meeting were relatively split as some believed that the outcome would only yield information about further monetary stimulus whilst some believed the bank would take immediate action towards growing risks by cutting rates, with some analysts even predicting a 20-bps cut. This saw the EURUSD spike higher after the announcement but quickly correct lower pushing down past 1.1120 as expected.
PRICE GRAPH: EURUSD AFTER ECB RATE DECISION (ONE-MINUTE TIME FRAME)
Another key point is that the ECB is considering introducing a tiered margining system to mitigate the impact that negative rates have on banks’ profitability, meaning that lower rates are intended for longer. They also signalled further asset purchases to come but given that the ECB has purchased 2 trillion euros of bonds since 2015, it is nearing its self-imposed ceiling of not owning more than a third of a country’s debt, which could see them increase the issuer limits to allow for further stimulus.
A report released earlier this month by the IMF said that the Eurozone would continue to face unprecedented risks stemming from trade wars, Brexit and Italy, and that the ECB should keep monetary policy accommodative as the19-nation currency bloc will face slowing growth in the coming year.
Focus on Draghi’s Meeting minutes for more insight into the ECB’s monetary policy and forward guidance at 1230 GMT which could see further volatility for the EUR.
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--- Written by Daniela Sabin Hathorn, Junior Analyst
To contact Daniela, email her at Daniela.Sabin@ig.com
Follow Daniela on Twitter @HathornSabin
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.