The European Central Bank overwhelmed and then underwhelmed the markets at the same time on Thursday, causing the euro to drop 1.6 percent against the dollar and then to jump 2 percent soon after.
The ECB made an unexpectedly aggressive effort to stimulate the Eurozone economy by rolling out a series of measures from rate cuts to more bond buying. The measures announced were more than expected and did not disappoint the markets as what happened in the December ECB meeting.
The euro reacted as it should have and fell across the board. However, what surprised the markets was when ECB President Mario Draghi started talking about the Bank’s outlook and suggested that the ECB was done with rate cuts and there would be no further rate cuts.
These were the measures announced by the ECB in an effort to boost stubbornly low inflation in the Eurozone and to stimulate growth.
– The ECB cut its main benchmark rate to zero from 0.05 percent
– It lowered the rate on deposits from commercial banks at the central bank to minus 0.40 percent from minus 0.30 percent, an unconventional move aimed at pushing banks to lend rather than hoard cash
– -It boosted its monthly bond purchases to 80 billion euros from 60 billion euros, thereby printing more money and pushing it into the economy
– It added corporate bonds to the assets it can buy, expanding the potential scope of the stimulus program
– It announced long-term loans at zero or negative interest of up to four years to help support Eurozone banks.
The ECB’s easing was a full spectrum one but ECB President Mario Draghi made a mistake and undid the very stimulus he hoped to achieve by signaling there would be no further rate cuts.
After a dip to $1.0822, EUR/USD jumped on Draghi’s comments to a three-week high of $1.1218.
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