Euro Down after Draghi’s Interest Rate Cuts

Euro Down after Draghi’s Interest Rate Cuts
September 7, 2014

The value of the Euro currency dropped rapidly after the European Central Bank slashed the interest rates further, and Draghi’s speech was nothing but bearish for the currency.

ECB is desperately trying to fight deflationary threats and the first tool to do that is to weaken the currency. However, there are questions regarding the timing of the easing and why these decisions were not taken earlier when both the other bigger central banks in the world, the Federal Reserve of the United States and Bank of England have embarked in massive quantitative easing programs, while the ECB balance sheet shrank for the same period. As a result, Euro appreciated against virtually any major currency and all looked great in the Euro-area. But recent data suggests the European economies may have a tough time ahead supporting growth and deflationary risks are bigger than ever.

The central bank announced an ABS (asset backed securities) plan as well, meaning the central bank is going to embark into buying these assets, and this is an aggressive easing strategy on top of the rate cut delivered. Considering the fact that the Fed now is in the tightening cycle, or at least they are preparing for the exit, the Euro should feel more negative effects. What’s even more important, a specific level regarding where the ECB balance sheet is heading, was given by Draghi at the press conference that followed the interest rate decision. The central bank is planning to bring it to the 3 trillion euros level, from the current 2 trillion level, and this means an easing of 1 trillion for the Euro-zone troubled economies.

Stock markets around the world enjoyed the announce as the first reaction to a stimulus by a major central bank should be higher equities. As a result, the SP 500 in the United States closed at historical highs and other equity markets advances as well.

The following trading week is not packed with top tier data like the previous one, but we should still see some interesting releases as Chinese CPI (inflation data) as well as US Retail Sales should offer more clues about the recovery path in the US. We should also get some indicator of the way the Bank of China will move on rates in the near term.

Moving on into the end of year trading, is going to be difficult to find an excuse for buying Euros, as the Fed is looking to end the quantitative easing program. Therefore, the path of least resistance would be to sell any meaningful rallies with 1.32-1.3300 area being the place where bears should step in again.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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