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Yesterday was "international central bank day" with the ECB, the BoE and the surprise of the day, the PBOC making policy and rate changes. Currency traders were counting down the policy decisions of the ECB and the Bank of England. Sentiment on risk wasn’t that bad. European equities cautiously extended the post-summit rebound. However, the euro failed again to profit. EUR/USD even drifted lower toward the 1.25 barrier. Investors were cautious to be too much euro long going into the ECB decision. A Spanish bond sale was no ‘grand cru’, but the country placed the amount they had hoped for. Early in the afternoon the central banks stepped into the spotlights. The Bank of England delivered as expected. However, at the same of time of the BoE announcement, the PBOC China reduced its key rates too. There was a very cautious positive reaction on the equity markets, but the decision didn’t provoke the boost for risk assets one would expect.
The breaking point for EUR/USD trading was the ECB decision. Draghi cut the repo rate by 25 basis points to a record low of 0.75%. This was the mainstream market expectation. The ECB also cut the deposit rate to zero. It is often very difficult to understand the drivers of a market reaction. This was also the case yesterday. Nevertheless, the sell-off of the euro started when the ECB decision hit the screens. EUR/USD dropped from the 1.2515 area to an intra-day low of 1.2364. The major part of this move was already completed at the start of the ECB press conference. So, as the cut in the refi rate was more or less expected, the sell-off the euro was due to the unexpected cut in the deposit rate. The (albeit small) decline in short-term market rates might have been a negative for the euro. (Currency) markets might also have been surprised that the ECB is taking such an ‘unconventional’ step. In the past, the ECB was very reluctant to walk away from the path of orthodoxy and was no front-runner in taking ‘unconventional’ measures. Yesterday’s ‘step in the dark’ might give the impression that the bank is desperately looking for means to address the problems in the economy and in the market. Whatever the interpretation, the euro paid a big price. During the press conference, the ECB president provides no reason for markets to change their negative assessment. Mr. Draghi said that downside risks are materializing. In addition, he didn’t give a clear explanation on the purpose of the deposit rate cut. All this didn’t give much confidence and EUR/USD held with striking distance of the intraday low. The US eco data were (ADP, claims, non-manufacturing ISM) were not that bad, but they were largely ignored by the (currency) markets. EUR/USD closed the session at 1.2392, compared to 1.2527 on Wednesday.
Overnight, Asian equities markets are mostly lower, but the losses are small. This also means that yesterday’s rate cut by the PBOC wasn’t able to support sentiment on risk. EUR/USD is holding in the 1.2380 area.