It looks like the world’s leading Central Banks started some secret competition, trying to find out who is going to make the decision, which will surprise the general public the most. Not long time ago, BoJ literally knocked everyone senseless by its negative interest rate; previously, the Swiss regulator twice made decisions that resulted in some incredible movements on currency market.
After decisions made by the ECB yesterday, hardly anyone would have the heart to blame Mario Draghi for lack of action. As a matter of fact, the latest meeting of the regulator turned out to be one of the most “fructuous”. The ECB reset the main rate to zero, the deposit rate is now in even more “negative”, and the volume of QE increased up to 80 billion Euros. Apparently, after thinking for some time, the ECB decided that it’s not enough, and included corporate bonds into its QE and announced new rounds of LTRO.
It should seem that it’s more than the “bears” could ever dream of. Of course, there were some rumors that the ECB was afraid that the deflation might return, but such determination surprised anyone. Commonsensical reaction of the market in the Eurodollar decline faced Mario Draghi’s words during the press conference, which followed pronouncement of a decision. With just one phrase, which implies that this decrease is probably the last one, Draghi sent the “bears” into a real market “slaughter”.
Moreover, it’s very difficult, if not impossible, to consider these words by Draghi incorrect. One could hardly imagine that the ECB would change the key interest rate in the negative direction. Further decrease of the deposit rate may results in some problems in the banking sector. More importantly, in the very beginning of the press conference, Draghi noted that the rates will be low ”for a long period of time”.
It’s not the only example of such policy – for many years the FRS had been keeping the interest rate at the “floor” and everyone understood that it would hardly be decreased further. So, the main question right now is when the ECB is going to increase its rates. This is why yesterday’s “faerie and hysterical” growth of the Eurodollar is most likely to be changed into further decline of the pair inside the downtrend.
In addition to that, it’s still unclear when the FRS is going to increase its rate. As long as the market is driven mostly by expectations, the growing expectation of the rate increase by the FRS and the intention of the ECB to keep their rates low for a long time may support the continuation of the downtrend. Anyway, as long as the ECB and the FRS are moving in different directions, the trend reverse is hardly to be seen in the nearest future.
RoboForex Analytical Department
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