ECB Shocks Markets by Cutting Rates - EUR in Freefall vs Pound, Dollar and More

“The ECB has today responded proactively to European deflationary threats and will begin buying a broad portfolio of simple asset-backed securities and covered bonds, starting in October. ECB President Draghi also admitted discussing the introduction of quantitative easing, which has traditionally boosted demand for both equities and bonds. Equity markets in Europe are currently trading more than 1.5% higher and government borrowing rates in Europe have fallen by more than 0.1% for peripheral countries," says Darren Ruane, Head of Fixed Interest at Investec Wealth & Investment.

On Friday we see the savage sell-off has eased, below is where we see the euro rate today (05/09):

1. The euro to dollar: EUR/USD is 0.1 pct higher on last night's close, if we convert 1 EUR into USD we get a rate of 1.2957. The rate fell 1.51 pct yeasterday - it's steepest decline in three years.
2. The euro to pound: EUR/GBP is 0.30 pct higher, If we convert 1 EUR into GBP we get a rate of 0.7949.
3. The euro to Canadian dollar: EUR/CAD is  0.17 pct higher, if we convert 1 EUR into CAD we get a rate of 1.4103.
4. The euro to Australian dollar: EUR/AUD is 0.09 pct lower, if we convert 1 EUR into AUD we get a rate of 1.38367.

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"The euro literally fell out of bed on Thursday after the ECB surprised many by cutting its main interest rates to new lows. The ECB cut its main refi rate to a historic low of 0.05 percent from 0.15 percent and is now slapping banks with a -0.20 percent interest rate for loans from the central bank," says Joe Manimbo at Western Union.

Today’s action by the ECB highlights how conditions continue to deteriorate in the 18-nation bloc.

Inflation, at 0.3 percent, continues to worsen, while unemployment remains unhealthy and above 11 percent.

Meanwhile, the ongoing crisis in Ukraine remains a confidence killer for both businesses and consumers. The euro responded by falling to July 2013 lows against the greenback below $1.31.

"Mr. Draghi stepped harder on the euro after his post-meeting press briefing said the bank would also buy asset-backed securities which seemed to stop just short of full scale QE. Without question, the ECB today delivered more than the market had anticipated, heaping significant pressure on the single currency," says Manimbo.

Ahead of the ECB: For the EUR, the September ECB Decision is Key

Analysts at Deutsche Bank reckon that we will see the roll-out of some form of quantitative easing at the meeting.

This is a euro-negative scenario that could push the euro dollar exchange rate down towards 1.3 in the near term.

However, there are others that do not see the introduction of quantitative easing just yet.

Berenberg bank is one of them, (their view can be read here - scroll down to the ECB report).

Barclays have also added to the debate giving us their viewpoint, analyst Thomas Harjes says:

"After ECB President Draghi’s speech at Jackson Hole last month, market expectations for the Governing Council policy meeting on Thursday, 4 September are running high again, and markets are increasingly pricing in further easing of monetary policy in the form of broad-based asset purchases (QE) by the ECB."

Barclays do note that the likelihood of QE has materially risen, but this is not yet their base case.

Harjes says:

"We agree that President Draghi's speech marked a turning point in ECB rhetoric (see Draghi at Jackson Hole: A major breakthrough, 24 August) as he called for flexibility on nominal deficit targets in the Stability and Growth Pact, more coordination to calibrate the fiscal stance of the whole euro area, and a public investment program financed by a euro area budget.

"But he also repeated calls for structural reforms, including labour market reforms to better align wages and productivity, and cautioned that fiscal policy should be designed in a growth-friendly way.

"While it is still not our base case scenario, we think the likelihood of QE has materially risen over the past weeks, but we see the ECB as inclined to wait until year-end, once all measures announced in June have been deployed.

"This month the ECB’s focus will be on the first of its new TLTROs announced in June, and in October it will finalise and publish the euro area bank balance sheet assessment before taking charge of bank supervision in November."