ECB Plan to Front-load Bond Purchases Hits Euro Hard

The EUR/USD plunged on Tuesday after a European Central Bank official said the central bank will front-load some of its planned bond purchases. The news sent Euro Zone sovereign bond yields sharply lower while triggering the worst drop in the Euro in two months.

The selling pressure accelerated when ECB board member Benoit Coeure said the central bank will increase its purchases of public and private debt in May and June. The move is designed to prevent distortions in the market caused by low liquidity in the summer. The central bank will still maintain its monthly average purchase size of 60 billion Euros by buying more bonds in May and June and fewer during the summer.

Also putting pressure on the Euro was a lower than expected German ZEW Economic Sentiment report. It read 41.9 versus an estimate of 48.8. The overall ZEW Economic Sentiment report showed a reading of 61.2. Traders were pricing in a reading of 62.4.

The GBP/USD and Euro were pressured today after U.S. Building Permits and Housing starts soundly beat estimates. The Building Permits report showed an increase of 1.14 million units. This beat the estimate of 1.06 million. Housing Starts were also strong with a 1.14 million unit gain versus pre-report guesses of 1.02 million units.

Also helping to break the British Pound was a report of lower than expected consumer inflation and core CPI. Consumer inflation posted a reading of -0.1% versus an estimate of 0.0%. Core CPI came out at 0.8%. Traders were looking for a reading of 1.0%.

The sharp rise in the U.S. Dollar also put pressure on June Comex Gold futures. Technical factors also contributed to the weakness since the market had just completed a 50% retracement earlier in the week.

The sell-off in U.S. Treasury Bonds, the stronger U.S. Dollar and a sideways stock market gave July crude oil futures an excuse to book profits, putting pressure on crude oil prices. Also helping to pressure the market were speculators betting on an increase of U.S. production.

Although Wednesday’s U.S. Energy Information Administration’s weekly supply and demand report is expected to show a slight drawdown of 1.4 million barrels, traders are concerned about the slow pace of the drawdowns. In addition, the pace of rig shutdown is also slowing, suggesting that producers may be positioning to turn back on a few rigs that had been idled when prices were falling earlier in the year.