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The European Central Bank surprised the financial markets on Thursday by cutting more than its benchmark interest rate. It also lowered its deposit rate and the rate on its marginal lending facility. All three key lending rates were lowered by 25 basis points; however, the move lowered the deposit rate to zero for the first time in history. The EUR/USD plunged sharply lower on the move, wiping out all of the gain from the June 29 rally.
The action in theory should flood the market with cash after deposits reached near record levels. Like the U.S. Federal Reserve, the ECB must believe that there is plenty of stimulus aid in the market, but that it is not being circulated properly. The move should pressure the Euro but encourage demand for riskier assets.
ECB President Draghi supported his decision by stating “downside risks to the Euro area economic outlook have materialized.” He added, “Economic growth in the Euro area continues to remain weak with heightened uncertainty.” This leaves open the door for further action later in the year.
Traders also sold the EUR USD because of a pair of friendly U.S.jobs reports. Weekly jobless claims fell by 14,000 and the ADP Employment report showed a better-than-expected rise. These reports dampened hopes that the Fed would implement additional quantitative easing measures to boost the faltering economy.
The GBP/USD plunged on the news that the Bank of England boosted the size of its quantitative easing program. Although the news of the increase by 50 billion pounds was already priced into the market, the Sterling sold off because of the strength of the U.S. Dollar. The Greenback was boosted by better than expected jobs data which caused many traders to shift their outlook for tomorrow’s U.S. Non-Farm Payrolls report. Traders are now concerned the Fed will refrain from any QE activity if the employment report is better than expected.
The rising U.S. Dollar is also pressuring gold. Typically, commodities priced in dollars fall when the Greenback rises because of lower demand. The move in August gold looks like position squaring rather than a trend change at this time. August crude oil is bucking this trend, however, and posting a small gain. Concerns about a possible conflict with Iran continues to encourage speculative buying and short-covering.
Overall, it’s been a one-sided Forex market with both the Euro and the British Pound falling after key decisions by their central banks. Further downside pressure was triggered by better-than-expected U.S.jobs data which dampened hopes of additional quantitative easing by the U.S. Federal Reserve ahead of Friday’s key jobs report.