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Euro Plummets as ECB Cuts Key Rate to 0.75% - Is This a ’White Flag’?

By , Currency Analyst
05 July 2012 12:58 GMT

UPDATE (12:58 GMT)

European Central Bank President has started his press conference. Presented below without commentary the key points he has raised:

  • Inflation pressure has been dampened further; expectations are anchored.
  • Inflation risks “broadly balanced” in medium-term; to fall below 2% in 2013.
  • Growth continues to remain weak, and some risks to growth outlook “have materialized”; Euro-area economy to recover gradually.
  • Risks to the economic outlook still “on the downside.”
  • “Heightened uncertainty” is weighing on confidence.
  • President Draghi welcomes efforts to address market tensions (in re: Euro-zone Summit).
  • European Central Bank ready to serve as agent to the European Financial Stability Facility (EFSF).
  • European Central Bank doesn’t want to pre-commit on future decisions; non-standard measures are “temporary by nature.”
  • In re: European Stability Mechanism (ESM): “we have to make it do.”

ORIGINAL ARTICLE

Has the European Central Bank wave the ‘white flag’? Market participants certainly seem to think so. The European Central Bank announced today that it would cut its main refinancing rate by 25.0-basis points from 1.00% to 0.75%. This is the first time in the history of the central bank that its key interest rate is below 1.00%.

From the European Central Bank:

  • The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.75%, starting from the operation to be settled on 11 July 2012.
  • The interest rate on the marginal lending facility will be decreased by 25 basis points to 1.50%, with effect from 11 July 2012.
  • The interest rate on the deposit facility will be decreased by 25 basis points to 0.00%, with effect from 11 July 2012.

EURUSD 1-minute Chart: July 4, 2012

Euro_Plummets_as_ECB_Cuts_Key_Rate_to_075_Is_This_a_White_Flag_body_Picture_2.png, Euro Plummets as ECB Cuts Key Rate to 0.75% - Is This a 'White Flag'?

Charts Created using Marketscope – Prepared by Christopher Vecchio

In the wake of the decision, the Euro has tanked across the board, with the most notable move coming in the EURUSD. The EURUSD traded from just above 1.2500 ahead of the decision to as low as 1.2395 soon after. With President Mario Draghi’s press conference around the corner at 08:30 EDT / 12:30 GMT, continued volatility is expected.

EURUSD Hourly Chart: June 26 to July 5, 2012

Euro_Plummets_as_ECB_Cuts_Key_Rate_to_075_Is_This_a_White_Flag_body_Picture_1.png, Euro Plummets as ECB Cuts Key Rate to 0.75% - Is This a 'White Flag'?

Charts Created using Marketscope – Prepared by Christopher Vecchio

Also of note, the EURUSD has now retraced its entire post-Euro-zone Summit bounce, and is trading at its lowest level since the first week of June.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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05 July 2012 12:58 GMT