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FX Brief: ECB hints of rate cuts and QE undermines EUR and underpins DAX

  • As we had expected, the ECB kept rates unchanged but said it now expects interest rates will remain at present "or lower" levels until the first half of 2020. Here are the key highlights from the statement:
    • "Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020."
    • …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."
    • Governing Council noted that it was "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."
    • …the Governing Council "has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases."
  • After a quick knee-jerk reaction, the markets reacted as you would have expected. The EUR/USD fell to a new session low near 1.1100 while the DAX and gold hit fresh session highs after the ECB altered its forward guidance.
  • French 10 year bond yields fell to record low -0.16% while the equivalent German bund yield dropped to a new record-low of -0.41%. Earlier, we saw the entire Switzerland yield curve drop into negative territory with the 50-year yields dipping below 0% for the first time since August 2016.
  • ECB President Mario Draghi is due to start his press conference at 13:30 BST – expect more volatility for the above markets.

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