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Euro Reverses Gains After ECB Monthly Bulletin Reminds Markets of Risks

Christopher Vecchio

Despite the recent sharp rally across risk-correlated assets, the European Central Bank’s report for the month of October resonated poorly with market participants, sending the Euro and other risk-correlated assets lower across the board.

THE TAKEAWAY: [ECB Release Monthly Bulletin for October] > [Market Risks Elevated] > [Euro Bearish]

The European Central Bank released its monthly bulletin today, the central bank’s equivalent to the Federal Reserve’s minutes following the Open Market Committee meeting, which was released late during the trading day on Wednesday. Like the Federal Reserve’s summary of the central bank’s most recent policy meeting, the ECB minutes painted a dire picture of the economic and monetary situation unfolding in one of the world’s most advanced economic regions.

While the ECB chose to keep rates on hold at 1.50 percent, much to the chagrin of market participants – the day before the decision, there was greater than a 60 percent chance priced in that the overnight lending rate would be cut by at least 25-basis points – policymakers were keenly aware of the “increased risks” facing the 17-nation economic zone.

The ECB noted that it “will continue to ensure that euro-area banks are not constrained on the liquidity side,” a clear sign that it is willing to extend currency swaps with the Federal Reserve if necessary in the coming months. It is important to note that the Governing Council clarified that “[A]ll the non-standard measures taken during the period of acute financial market tensions” are “temporary in nature.”

EUR/USD 1-minute Chart: October 13, 2011

Euro_Reverses_Gains_After_ECB_Monthly_Bulletin_Reminds_Markets_of_Risks_body_Picture_4.png, Euro Reverses Gains After ECB Monthly Bulletin Reminds Markets of Risks

Charts created using Strategy Trader– Prepared by Christopher Vecchio

In response to the release, risk-correlated assets, and in particular the Euro, fell across the board against the Japanese Yen and the U.S. Dollar. The EUR/USD was down nearly 70-pips, at the time this report was written. Similarly, the Australian Dollar and the New Zealand Dollar were down similar amounts against the Greenback.

Later in the day, there is a key Italian bond auction on the docket which could exaggerate the pullback in risk-appetite. If bond market participants aren’t willing to bid for Italian bonds, the broad consensus is that the European Financial Stability Facility is not big enough to secure Italy.

--- Written by Christopher Vecchio, Currency Analyst

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