Article by ForexTime

Once again, Mario Draghi surprised market participants cutting interest rates and pushing the Euro to a fresh 14-month low.  Support levels are seen near the June 2013 lows near 1.2750, while resistance is seen near former support at 1.31.  Traders should be cautious as the RSI is printing a reading of 20, which is well below the oversold trigger level of 30 and could foreshadow a correction.

The ECB cut rates, and confirmed the start of the ABS purchase program, which was introduced in June, and another covered bond purchase program, but failed to announce the broad based asset purchases that markets had been hoping for. Draghi did leave the door open for additional measures and said the lower bound on rates has now been reached, which leaves few other options than full blown QE should the situation get worse.

The ECB cut official rates by 10 basis points, which left the main refinancing rate at an historic low of 0.05%. The deposit rate was cut to -0.20% and the marginal lending rate to 0.30%. Draghi confirmed that the cut was also designed to give a clear signal to markets that the lower bound on rates has now been reached, which should support the TLTRO program when it starts.

The new set of staff projections cut the growth forecast for this year and next, but lifted the forecast for 2016 and the inflation forecast for the next two years was in fact left unchanged, leaving Draghi to point to market measures as a sign that inflation expectations deteriorated since the last meeting and that Thursday’s move was therefore necessary. At the same time nobody will argue with the central bank that the risks to the growth outlook have increased considerably as the tensions with Russia threaten to derail the German recovery, which so far has been a key driver of Eurozone growth.

Draghi was very eager to stress the importance of structural reforms for the recovery, he effectively once again gave a helping hand to countries that are slow to move on budget consolidation and reforms to improve competitiveness. Refinancing costs have fallen to record low levels in countries such as Italy and France, regardless of the still difficult fiscal situation and the fact that both countries have fallen behind in their reform efforts.

Article by ForexTime

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