FX Week 10 November 2013

EUR plunges on ECB ‘surprise’


The EUR fell sharply at the end of last week after the ECB cut key interest rates and as the US economy showed surprisingly strong momentum. The main catalyst for the EUR/USD’s plunge to 1.33 on late Thursday was the decision by the ECB to cut its main refinance rate to 0.25% as we had expected it might. Most of the markets, however, were surprised by the move, and took it to mean that the ECB is becoming more concerned about deflationary risks across the Eurozone economy, with the possibility that more measures will still have to be introduced to shore up demand. ECB President Draghi acknowledged that inflation will remain low for a prolonged period, although he was at pains to point out that it was not at risk of entering a period of deflation. Although the EUR managed to recover back above 1.34, it sold-off again on Friday following the strong US October employment report, and after France’s credit rating was cut by S&P to AA from AA+ on account of its poor fiscal position

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