FX Market Summary 06-05-2014: ECB Uncharted Territory

After a sharp sell-off in early US trading on Thursday, the Euro proved resilient as selling momentum faded. Some early European data releases caused a flurry of excitement with stronger than expected readings for German factory orders and the UK Halifax house-price index. The Halifax data was striking with a 3.9% monthly increase, although this reflected a correction from weakness in previous months and the annual increase was around 9.0%.

Calm was the prevailing mood ahead of key interest rate decisions later in the day. GBP/USD held a solid tone and spiked to highs around 1.6790 ahead of the MPC announcement with stops triggered and EUR/GBP dipped towards the 0.81 level.

As expected, the Bank of England left interest rates on hold at 0.50% and the MPC made no statement which triggered a modest downward correction for the UK currency.

All attention was then on the ECB with widespread expectations of a cut in rates. In the event, the ECB did cut all three benchmark rates with a slightly smaller than expected cut in the refinance rate to 0.15% from 0.25% while the deposit rate was cut to -0.10%, the first time a major central bank has moved to negative rates.

EUR/USD initially held steady before being pushed lower by the promise of further monetary measures. Subsequently, at the news conference, Draghi announced that two targeted LTROs would be introduced while there would no longer be sterilisation of bond purchases under the old SMP programme. As these measures were introduced, EUR/USD dipped sharply to fresh four-month lows just above the 1.3500 level.

The ECB also stated that it was working on a programme to buy asset-backed securities, but with no further details at this stage. There was a cut in inflation forecasts for all the next four years in the latest staff projections with the rate below the 2.0% target throughout. EUR/USD found support at lower levels and rallied back to test resistance above 1.36 on disappointment that the bank had not been more aggressive.

US jobless claims data was close to expectations at 312,000 in the latest week from 304,000 previously which maintained some element of confidence surrounding Friday’s employment report. USD/JPY was resilient without being able to break above the 102.80 area.

Sterling held firm with GBP/USD moving to attack the 1.6790 area once again while EUR/GBP traded to lows of 0.8065 which was the weakest level since December 2012.

Underlying risk appetite held firm as equity markets gained support from expectations of a loose global monetary policy and AUD/USD pushed to challenge resistance above 0.93.

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