ECB May Interest Rate Decision Review

The European Central Bank released its interest rate decision yesterday and as expected, didn’t rock the markets with any rate cut. Curiously though, ECB President Mario Draghi said that no interest rate cuts were even discussed at the last meeting. This was a little surprising, as some euro zone countries (like Spain) are actually back in recession mode and the ECB even acknowledged the potential for more weakness going forward as more and more uncertainty builds up.

The lack of any mention of rate cuts or further easing helped the euro rally following the statement.

As you can see from the EUR/USD 15-minute chart above, the pair slowly edged downwards prior to the statement as most traders priced in expectations of dovish remarks from Draghi. The moment EUR/USD touched the 1.3100 handle, it bounced right back up when the central bank head made no mention of rate cuts or further easing. That was a 75-pip jump right there!

As the excitement faded, EUR/USD retreated from the 1.3175 area and slid right back to its day open price around the 1.3150 level.

Still, many market whiz kids believe that the ECB hasn’t exactly ruled out more accommodative monetary policy moves or even a rate cut down the line.

Speaking on the ECB’s Securities Market Program (aka the “lets-buy-a-boat-load-of-government-bonds” program), Draghi said that it was an important tool and wouldn’t confirm nor deny how long it would be made available. Draghi also said that exiting right now would be premature and that the ECB would be “clearer with its assessment” during the next ECB statement in June.

This was a slight change in tone from the previous meeting, where we were actually hearing catcalls from German policy makers to start thinking about an exit strategy as inflation was starting to heat up.

Looking ahead, we could see the euro stay afloat for the near term as the markets wait for the June rate statement. While it looks like ECB policymakers would rather sit on their hands for now, they could simply be waiting for more economic figures and mulling more decisive monetary policy action for their statement next month.

Unless the euro zone climbs out of the rut and convinces ECB policymakers that debt troubles are no longer potential hazards, the ECB might come out with more force and pump up their bond purchases in their June meeting. Who knows? They could even come up with more creative measures similar to the 3-year LTRO program later on. If that happens, we might just see EUR/USD test the 1.3000 handle yet again!

For now though, it’d be best for traders like you and me to keep a close eye on what’s going on in the euro zone. You can count on my Piponomics articles and Pip Diddy’s Daily Forex Fundamentals to keep you in the loop!


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