ECB Surprise Cut and US Positive GDP Boost Dollar

A drop in inflation in the Euro zone forced the European Central Bank to cut its benchmark interest rate by 25 basis points. The benchmark rate is 0.25 percent, the new record low. ECB president Mario Draghi led a bold cut that surprised the markets as they were expecting a tapering move by the Federal Reserve move sooner than an ECB rate cut.

Pound drops after ECB Surprise cut and US Positive Growth Indicator - 1 Day Graph

Combating economic weakness and low inflation are at the top of european agenda. Countries that have just existed the recession through austerity measure are facing strong deflationary forces. Italy’s finance minister complained against a too strong euro. The currency has appreciated to a point where it is starting to affect German exports. Draghi has acted pro-actively, which in itself is quite a surprise given the past ECB leadership, and rather than wait has cut rates in an effort to fight deflation.

Pound drops after ECB Surprise cut and US Positive Growth Indicator - 1 Day Graph

The United States gross domestic product posted a 2.8 percent gain in the third quarter of 2013. This is the fastest pace since the same quarter in 2012. The positive news boosted the US dollar who recovered from losses earlier in the month. The US recovery is still shaky considering tomorrow’s employment indicator release. The Non-farm payroll report will shine a light on a post US-shutdown employment. The forecasts are not looking optimistic, with some analyst even considering negative growth. The more moderate analyst point to a 100k new jobs added, with some even going for a higher than 150k print.

Pound drops after ECB Surprise cut and US Positive Growth Indicator - 1 Month Graph

The Bank of England held rates today which made it more vulnerable to a move after the ECB cut and US positive data. US dollar strength is not favoured by the current market so there is some indecision on where the USD should trade, specially before NFP. The Bank of England has not touched rates since March 2009. Given the 7 percent employment target, the central bank was not expected to cut rates.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza