Trichet Giveth and Draghi Taketh Away

ECB Interest Rate Statement Review

In a surprising turn of events, Mario Draghi, the new ECB President, announced on Thursday that they have decided to cut rates by 25 percentage points (1.25% to 1.00%). While some market participants already expected Draghi to reverse former ECB President Trichet’s monetary policy, they did not expect what came with it…

The ECB, in addition to the rate cut, dashed the market’s hope for increased bond-buying activities. Instead, Draghi said that they would actually stop soon, as the unconventional bond-buying program they did in August was merely temporary. To add insult to injury, Draghi ruled out funneling ECB money to debt-ridden euro zone nations through the International Monetary Fund (IMF).

The ECB’s move was viewed negatively by the market and resulted in a surge in the interest rates of debt-ridden nations must pay to borrow money. Italy’s borrowing costs rose to 6.43% from 5.93% while Spain’s bond yields skyrocketed to 5.75% from 5.35%.

It appears that the ECB is caught between a rock and a hard place. On the one hand, they WANT to do something to prop up euro zone’s hurting economy. But on the other hand, they COULDN’T, as they are bound by rules and regulations.

Remember, the ECB must cater to the needs of 17 different nations with different levels of growth. A monetary policy that may be helpful to one member nation could hurt another.

It looks to me that Draghi, along with the other important members of the ECB, is starting to feel helpless since cutting rates is the only substantial thing he can do for now. With all the debt problems the euro zone is facing, who can really blame them?

Unless some really good news comes during the holiday break, I suspect we’ll see the ECB cut rates for the second time in January to bring down the benchmark interest rate to its lowest level ever.

What does this mean for EUR/USD?

EUR/USD Weekly Chart

Looking at the weekly chart of EUR/USD, we see that the pair was clearly rejected at the 1.4000 level. It was then followed by FOUR straight weeks of losses. Last week was the only one that posted a gain… and an unconvincing rally at that.

Was last week simply retracement? Highly likely, especially with all the negative news coming out of euro zone. That being said, don’t say I didn’t warn you if you see the euro continue to give up ground against other major currencies in the weeks leading to the next meeting!

1 comment

  1. Schnitzel

    I think a break of 1.3200 will trigger a large selloff towards 1.3000, 1.2900, 1.2700 and even lower. Although it is unlikely that the euro will lose its strength so fast. It might take weeks, months or even years.

    Reply

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