Forex Trading Guide

ECB Interest Rate Bounced the Euro

As widely expected, the ECB cut its benchmark lending rate by 25-basis points to 1.0%. However, the interest rate cut announcement was made by ECB President Trichet’s post-decision press conference. This prompted the euro to bounce off its session lows against the dollar and climbed to a one-month high against the dollar.

ECB President Trichet also announced that the Bank would purchase about 60 billion Euros (about 50 billion Pounds or 75 billion Dollars) in covered bonds and provide unlimited funds to banks for up to one year. The ECB move was in concurrent to similar actions by the Federal Reserve of US, The Bank of England and the Bank of Japan to buy toxic assets of near bankrupt Banks.

The idea is to revive a market which has been very heavily touched, and all that goes with the survival of the market including spreads, liquidity, and the depth of the market.

These decisions have been taken to promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help improve market liquidity in important segments of the private debt security market and to ease funding conditions for banks and enterprises.

Bloomberg reported:

May 7 (Bloomberg) — The euro climbed to a one-month high against the dollar as traders said the European Central Bank’s plan to buy 60 billion Euro ($80.5 billion) in covered bonds isn’t aggressive enough to debase the currency.

Sterling dropped from a four-month high versus the dollar after the Bank of England said it will raise bond purchases by 50 billion pounds ($75 billion) to give the British economy additional support. The ECB joins the Federal Reserve, the Bank of Japan and the Bank England in buying bonds to spur growth.

The Fed, the Bank of Japan and the Bank of England cut their benchmark interest rates to near zero and began printing money to buy government bonds to lower interest rates and ward off deflation.

Technorati : Dollar, ECB, Euro, Interest Rate, Pounds