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ECB Matches Dovish Shift in Fed Rhetoric by Hinting at Negative Rates

Christopher Vecchio

THE TAKEAWAY: EUR European Central Bank Rate Decision > Main Refinancing Rate Cut to 0.50% from 0.75% > Deposit Facility Rate on Hold at 0.00% > Negative Rates Discussed at Policy Meeting, ECB’s Draghi Reveals in Press Conference > EURUSD BEARISH

The European Central Bank’s press conference ended very differently than it started. Whereas the EURUSD was trading near 1.3200 when ECB President Mario Draghi started speaking, by the time he had walked away from the podium, the EURUSD was down over one percent and more questions were raised than those that were answered. Certainly, a number of fundamental concerns have been raised that will weigh on the Euro going forward.

The first thirty minutes of the press conference were more or less filler time with the usual quips from the head of the ECB: inflation expectations remain thoroughly “anchored” and “broadly balanced”; economic risks remain “on the downside”; and that the ECB will remain accommodative for “as long as needed.” These presented little fuel for a move in the EURUSD in either direction.

What really hit the Euro hard this morning – and completely shifted the tone around the ECB – was ECB President Draghi’s comments that there was: 1) a strong prevailing consensus towards easing policy; 2) that there was discussion of a 50-bps rate cut; and most importantly 3) that he had an “open mind” towards negative deposit rates. The anatomy of the press conference is detailed below, and shows how important the “negative deposit rates” comment actually was:

EURUSD 1-minute Chart: May 2, 2013

ECB_Matches_Dovish_Shift_in_Fed_Rhetoric_by_Hinting_at_Negative_Rates_body_Picture_1.png, ECB Matches Dovish Shift in Fed Rhetoric by Hinting at Negative Rates

Charts Created using Marketscopeprepared by Christopher Vecchio

Following the release of the ECB policy decision at 07:45 EST/11:45 GMT, the EURUSD initially dipped towards 1.3120 before climbing to fresh session highs at 1.3220/25 ahead of the ECB press conference. However, once the ECB press conference started, the EURUSD traded choppily between 1.3190 and 1.3220/25, before finally beginning to decline once it became clear that the 25-bps rate cut was the only major policy measure taken (no SME lending program).

However, the real blow to the EURUSD came when ECB President Draghi said that negative rates could be implemented, and that they had been discussed as recently as today’s policy meeting, the EURUSD was trading just under 1.3180 when negative rates were first mentioned, and had fallen as low as 1.3060 at the start of the US cash equity session. Significant pressure has been observed across all EUR-based pairs and is not expected to dissipate on Thursday. Relief could be around the corner, however, with the critical US labor market report for April due tomorrow.

--- Written by Christopher Vecchio, Currency Analyst

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