Euro Weakens As ECB Signals September Rate Cut, More QE

The euro fell to a two-year low against some of its major currency rivals on Thursday after the European Central Bank (ECB) left interest rates unchanged but prepared investors for additional easing in the fall. President Mario Draghi essentially maintained a sour outlook on the eurozone economy, suggesting that the ECB needs to maintain and deliver a â€œhighly accommodative” policy even when Christine Lagarde becomes the new head.

At its July policy meeting, the ECB left its main refinancing, operations, marginal lending facility, and deposit facility unchanged at 0%, 0.25%, and -0.40%, respectively. These are the lowest rates since the regional sovereign debt crisis back in 2011.
In a key part of the ECB’s policy statement, the central bank noted that it anticipates its primary interest rate to stay “at their present or lower levels through the first half of 2020.” This is a revision from past statements and now suggests that a rate cut is imminent, proving that its quantitative easing (QE) over the last few years has been ineffective.
That said, the ECB did hint that it might pull the trigger on other unconventional stimulus measures to spur European markets. One of the options includes implementing “a tiered system for reserve remuneration,” which would reduce the charge that banks pay to store their excess cash at the ECB. The ECB is also proposing reconsidering “the size and composition of potential new net asset purchases” and thinking about another round of QE.
Draghi said in a statement:

The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.

Ultimately, analysts are anticipating a reduction in rates in September.
On Wednesday, more economic data came in that support the opinion that the European economy is running on a treadmill. The Markit Services purchasing managers’ index (PMI) for July was 53.3, down from 53.6 in June. The Markit Manufacturing PMI for July came in at 46.4, down from 47.6 in June – this index has been below 50 for six of the seven months in 2019. Year-over-year loan growth was a better-than-expected 3.3% in June.
The EUR/USD currency pair jumped 0.3% to 1.1172, from an opening of 1.1142, at 14:35 GMT on Thursday. The EUR/GBP rose 0.35% to 0.8954, from an opening of 0.8925.

If you have any questions, comments, or opinions regarding the Euro, feel free to post them using the commentary form below.

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