After weeks of bullish investors supporting a strong euro, the single currency has had the rug pulled from under its feet as the ECB cuts its main refinancing rate by 25bps to 0.25%. Ever since last week’s inflation figures showed inflation slowed to 0.7%y/y, there has been increasing pressure for the ECB to act against disinflationary pressures. Today was that day and inflation data was enough to tip the ECB over the edge.
A strong euro has also been an issue for discussion of late, and the decision to cut rates has forced GBPEUR to rally through 1.20 although the rate has now stabilised around 1.1990. EURUSD also took a sharp hit and is now below 1.34. Considering the ECB had no intentions to weaken the euro, it could be said that they have killed two birds with one stone.
Although the market continued to highlight the potential risk of deflation, ECB President Draghi said that despite the expectation of prolonged low inflation, medium to long-term projections are still anchored in positive territory. This suggests that there may not be a need for further cuts in the future and even if there is, the ECB has said there are still a number of tools at its disposal.
Sasha Nugent
Currency Analyst
