Draghi speaks and the EURUSD rises
Draghi gave a picture of "re-anchoring" inflation expectations at very low levels (forecasts were revised lower), GDP growth forecasts were revised down too, and Draghi recognised the eurozone slowdown was heavier than expected. The ECB decided on the following actions:
- 10 basis point rate cut to -0.5%.
- A tiering system will be introduced, where the exempt tier will be remunerated at 0% and applies to the minimum reserve times six. Both the multiplier and the interest rate can be changed over time.
- Forward guidance on rates is open-ended and state-dependent.
- Quantitative Easing will be restarted with EUR20bn per month, starting 1 November. For the first time, there is no end date added to QE.
- The targeted longer-term refinancing operations will be repriced and include an incentive for banks to increase lending. Banks which exceed the benchmark ECB loans will be charged at the average deposit rate. The maturity of the TLTROs will be extended from two to three years.
The EURUSD fell on the news, but then retreated back towards announcement highs with the press conference. The question is, 'does this package satisfy the bears to keep selling?' Price action at the moment suggesting a mixed picture and the details of the decision are not particularly surprising. A sell the rumour, buy the fact reaction wouldn't be a massive surprise on this. Near term risk for EURUSD bulls with stops below descending trendline.
