How Draghi Crushed the Euro

What a bloodbath! The euro suffered a sharp selloff after the ECB interest rate statement, as EUR/USD dove from a high of 1.3223 to revisit its 4-month lows around 1.3110.

Other euro pairs underwent similar declines, with EUR/GBP tumbling to its lowest level since May and EUR/AUD breaching the neckline of the double top pattern that Big Pippin pointed out in today’s Chart Art.

What’s interesting to note is that this sudden reaction took place during the ECB press conference, almost an hour after the central bank already announced its decision to keep interest rates unchanged at 0.50% as expected.

What the heck did Draghi say?!

As it turns out, the ECB head honcho stuck to his forward guidance routine in emphasizing the central bank’s pledge to keep rates low for an extended period. When asked about potential rate cuts though, Draghi admitted that policymakers actually discussed lowering interest rates during their meeting! *gasp*

According to Draghi, the euro zone economy may be rebounding but the recovery is still for weak for policymakers to say that rate cuts are off the table. He even noted that ECB officials currently have a downward bias on interest rates, as fiscal stability remains a concern and the economic recovery is still feeble.

What are the odds of an ECB rate cut?

It depends on the money markets. Draghi specified that the ECB is “ready to act” in case they see money market movements like a rise in bank-to-bank borrowing costs and peripheral bond yields that they believe are unwarranted. Inflation won’t be a problem either, as the ECB only expects a 1.5% increase this year, only slightly higher than the previous forecast of 1.4%.

One thing that you have to remember is that the ECB has a very cautious stance on the region’s growth. While it upgraded its growth forecasts this year, it also emphasized the downside risks in the near future and even downgraded 2014’s growth estimates from 1.1% to 1.0%.

What does this mean for the euro?

With the ECB renewing its commitment to keep its borrowing costs at record lows for an extended period of time, it might be a while before we see any catalyst that would push the euro higher.

The ECB’s commitment to low interest rates should keep the EUR/USD under heavy pressure as the U.S. Federal Reserve prepares to taper. It could also be on weaker footing compared to other major currencies whose central banks aren’t biased to ease.