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Yesterday’s meeting not a knock out for Draghi

Yesterday’s meeting not a knock out for Draghi

Mario Draghi came out fighting in the battle against deflation as the European Central Bank (ECB) announced that it would cut the deposit rate to -0.40% from -0.30% as expected. However, the markets did not price in a cut to the main refinancing rate, which fell to 0% against the consensus of 0.05%. The ECB also announced that it would step up its monthly bond purchases by €20 Billion per month, taking the total tally to €80 Billion per month.

The Euro initially weakened against the Pound as the pair soared past the 1.30 level following the aggressive stimulus, to reach a daily high of 1.30672. But the positive market reaction soured; President Draghi announced at the press conference that he did not anticipate the need to cut rates further, and this clearly changed investors’ sentiments as the Euro then gained 2.5% against the Pound. The pair fell from its daily highs to find support at 1.2744. The Euro initially fell 1.6% against the Dollar to 1.0822, but gained over 3.5% to reach as high as 1.1218, one of the biggest one-day swings in the currency’s history.

Draghi explicitly said the bank’s focus will shift from rates to unconventional easing, however, meaning that further measures are not out of the question.

Following the ECB announcement yesterday, Sterling not only experienced extreme volatility against the Euro as expected, but against the Dollar as well. GBPUSD opened just under 1.4200 and retreated to lows below 1.4150, but more than reversed these losses to settle at 1.4296. Cable did open this morning at 1.4250, though, as USD looks to make a recovery. Today we have UK trade balance announcement at 09.30am. Investors will see if export demand has dropped as much as expected ahead of next week’s budget statement.

Data to watch: 9.30am UK Trade Balance. 1.30pm US Import & Export Price Index (MoM & YoY) (Feb).

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