EURUSD Plunges On ECB Decision

Posted In EUR, EURUSD, Minor Pairs, Trading Tweets, USD - By Richard Lee On Thursday, September 8th, 2011 With 0 Comments

It’s the announcement that everyone was expecting. But, just not this pessimistic.

Following their decision to leave interest rates on September 8th unchanged at 1.50%, European central bankers revealed two major reasons behind their decision this time around. And, it’s not very promising.

As with other central banks in recent days, ECB officials kept rates unchanged on the increasing risks being posed by the current European debt crisis. This week alone, central banks in Australia, Sweden and Korea kept rates steady. Although no real news has been released to worsen the public opinion over the European situation, the fact that politicians still haven’t offered a solid solution has sparked concern among global financial leaders. It also doesn’t help that insurance on potentially defaulting nations has risen in the past week – along with bond yields in Italy and Spain, the region’s third and fourth largest economies.

Without a real strategy for resolution, the specter of default and full financial collapse in the EU will continue to mess with monetary policy both in and out of Europe for the months to come.

Citing not only the European crisis, policy makers pointed towards a worrisome slowdown in the European Union, particularly in export growth. With manufacturing and export sectors in Germany – the backbone of the EZ recovery – visibly stalling, overall gross domestic product will surely and negatively be affected. This has left the ECB to cut growth forecasts for the year – which wasn’t wholly expected by the market. Instead of 2% EZ growth, central bankers are now expecting a 1.6% pace of expansion in 2011 – accompanied by a 1.3% rise in 2012.

This has led some to think that the ECB is headed for an immediate rate cut – which could be true.

But, the ultimate decision to cut rates will likely not come from President Trichet, but his successor in about two months time. President Trichet will likely not want to retire from his position as the ECB head on a rate cut. Still, it’s a good enough reason to dump Euros for those that have amassed positions in the currency since January. Analysts had earlier predicted European interest rates to move higher by another 25 basis points this year.

So, given the currently bearish sentiment, Euro selling is likely to continue in the medium term as prospects for the single currency aren’t that positive given how long the crisis has lasted and the region’s inability to manufacture a solid plan of action. Look for the 1.4000 level to act as a key pivot for the longer term ahead of President Obama’s speech on US employment and growth.