European Central Bank Holds Key Rate At 1.5 Percent

By Trang Nguyen,

THETAKEAWAY: European Central BankHolds Key Rate at 1.5 percent > Speculation on additionalmonetary supply increased > Reactions inthe Euro mixed

At the European Central Bank meeting today, the Governing Council decided to leave key interest rate unchanged at 1.5 percent for two consecutive months after lifting interest rate from 1.25 percent in July to curb inflation. ECB’s benchmark rate decision matched with the median projections from Bloomberg survey. Eleven of fifty two economists polled by Bloomberg expected an interest rate cut by at least a quarter-percentage point while the majority anticipated no change. While Eurozone has been struggling to boost regional economic growth and prevent debt crisis from spreading, its inflation remained very high. Economic activity in 17-nation region expanded merely 0.2 percent in the second quarter of this year compared to 0.8 percent in the first quarter. Regardless, latest data showed that the Eurozone’s consumer price index rose to 3 percent in September, well above the regional inflation rate target.

EUR/AUD 1-minute Chart: October 6, 2011

Charts createdusing Strategy Trader – Prepared byTrang Nguyen

Intensified sovereign debtcrisis in recent weeks and “particularly high uncertainty anddownside risks” reinforces expectations of the benchmark ratecut and market participants even priced in an eighty-eight percent chance of a 50 basis point rate cut onMonday . Sincethe European Central bank announced to keep its key rate on hold,currency traders showed mixed reactions in the euro. As can be seenfrom the EUR/AUD 1-minute chart above, the EUR/AUD jumpedapproximate 80 pips from 1.3660 to 1.3740. TheRelative Strength Indicator fallingbelow 30 signaled overbought reactions regarding to the EUR/AUDpair. The single currency regained its footing against the aussieas investors have shifted to bet on additional quantitative easingto spur economic growth in Eurozone. Besides, the decision wasreleased amid heightened speculation on ECB leaders’ moves torecapitalize banks to tame crisis, prompting foreign exchangetrading crowd to cut their holdings on high-yieldcurrencies.

EUR/USD 1-minute Chart: October 6, 2011

Charts createdusing Strategy Trader – Prepared byTrang Nguyen

Currencytraders’ reaction regarding to the EUR/USD was reversed tothe EUR/AUD pair. After the ECB’s announcement, the eurorelatively weakened versus the dollar. The currency pair dropped 45basis points from 1.3310 to 1.3250. At the time this report waswritten, the euro is trading at 1.32550 dollars. UnlessEuropean leaders have a clear act to solve crisis that help scaleback risk appetite, the greenback would still be the safe haven tomonetary managers.

--- Written by Trang Nguyen, DailyFX Research Team for DailyFX.com

To contact Trang, email tnguyen@dailyfx.com
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/market_alert/2011/10/06/100611_European_central_bank_rate_decision.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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