Overnight, the euro fell sharply against most currency pairings, as the ECB delivered on expectations with a 25 basis point cut to its official cash rate along with a dovish assessment of the European economy.
The decision to lower the cash rate by 25 basis points was not unexpected, although some analysts had been anticipating a cut of 50 basis points. What the market hadn’t anticipated was a lowering of the deposit rate to zero.
Nonetheless, there was a clear element of disappointment that the ECB didn’t deliver any additional liquidity stimulus on the back of the rate cut, as Draghi was clearly not willing to be too aggressive in one hit, merely indicating that the Council did not discuss any non-standard measures at the meeting. Speaking at the ECB’s post meeting press conference, Draghi was considerably more dovish than a month ago, especially in the assessment of economic activity. While Draghi deemed inflation risks to be ’broadly balanced‘ in the medium term, he expected inflation would slow further in 2012 and fall below 2% in 2013.
Draghi noted that credit flows were weak and were likely to remain that way as ’risk aversion‘ restrains banks' lending. Tonight’s non-farm payrolls report will be a key influence on the currency markets, with a stronger-than-expected print likely to put more downside pressure on the euro as traders price out expectations of more QE from the Fed. Having ended yesterday’s Australian session around the 1.2530 level, the euro slumped to a low of 1.2364 before recovering modestly to close US trade at 1.2392. Upon resuming for Asian trade, the euro is essentially unchanged.