With ECB announcing a new targeted long-term refinancing program and aggressively cutting growth forecast, short EUR/USD?
Yesterday, the ECB left their interest rates unchanged as widely expected. However, it was extremely dovish as it pushed back its first post-crisis interest rate hike to 2020, cut its economic forecasts, and launched a new round of cheap bank loans.
- ECB President Draghi said, “Economic risk still tilted to downside despite actions.” He also cited “the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.”
- Firstly, Draghi extended the ECB’s forward guidance on ultra-low interest rates, saying it doesn’t expect to begin raising rates until 2020. This was compared to holding rates until the summer of 2019, as mentioned previously.
- Secondly, the ECB launched its third iteration of TLROs (targeted long-term refinancing operations) to eurozone banks. The loans would begin in September and have a two-year maturity that aims to boost inflation and preserve favourable loan conditions.
- Lastly, the ECB aggressively cut its 2019 growth and inflation forecasts from 1.7% to 1.1% and 1.6% to 1.2% respectively.
- EUR/USD fell sharply, breaking the historical support at 1.1200. We expect further losses in euro. If NFP is softer than expected, we could see a relief rally that will cause more sellers to enter. Vice versa, if NFP data is strong, this could see this pair fall towards the 1.110 price level.
Fullerton Markets Research Team
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