– European Central Bank keeps main rates on hold as expeted.
– President Draghi admits ECB discussed cuts to deposit rates.
– EURUSD sinks to under $ 1.1200 from above $ 1.1300 at the start of the press conference.
The European Central Bank’s policy decision went off without a hitch today – its key interest rates were maintained at their prior levels – but it was President Mario Draghi’s press conference that proved to be the real showstopper. Highlighting concerns over emerging market growth and financial market volatility – two of the same concerns that the Federal Reserve used as justification for not hiking rates in September – the ECB suggested that it was too soon to think the period of loose monetary policy was coming to a close. It seems that, since the September FOMC meeting, markets had been starting to price in more ECB easing as collateral damage from the Fed’s decision.
Furthermore, highlighting falling short-term inflation expectations, sustained low energy prices, and a stronger trade-weighted Euro over the past six-months, President Draghi admitted that the ECB had a discussion about cutting deposit rates today. Coming into this meeting, it was widely anticipated that the ECB was firm on its rate policy and would only look to ease further via extraordinary measures (QE); instead, Mr. Draghi & co. are flirting with the notion that zero interest rate policies (ZIRP) can easily become negative interest rate policies (NIRP).
As it goes, it seems the market has quickly adjusted to the idea that December is now what’s considered a live meeting – one at which the ECB could bring forth substantive policy changes like a change in the QE program or cutting rates. Besides lower rates further, changes in the QE program could come along the lines of: changing its duration past its September 2016 expiration; a change in the program’s scope (what bonds can be purchased); and/or a change in the size (the run-rate of purchases, currently at €60 billion/month). All of these changes to the QE should prove to be materially negative for the Euro over the coming months – a re-run of early-2015 for the Euro and perhaps the US Dollar – and EURUSD is trading lower as markets adjust to this possible outcome.
EURUSD 1-minute Chart: October 22, 2015
Right ahead of the press conference, EURUSD was trading at $ 1.1309. However, within moments of the press conference starting, EURUSD immediately plummeted, trading at low as $ 1.1179 amid President Draghi’s commentary. At the time this report was written, EURUSD was trading back to $ 1.1206.
— Written by Christopher Vecchio, Currency Strategist
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