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ECB:Surprise interest rate cut

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ECB:Surprise interest rate cut

Currency markets were on edge early on Thursday as traders awaited the decision from both the ECB and the BoE in interest rates. There was very little speculation that the BoE would make a move given the strength of recent data. In fact, many analysts now believe the BoE is closer to tightening rates than easing them. The real speculation was what the ECB would do given the relatively low levels of inflation and tepid growth data. In a surprise move the ECB cut interest rates reducing their refinance rate by 25 basis points.

Rate cut speculation for the ECB was eased a bit after yesterday’s as stronger than expected PMI data was perceived to have taken the heat off the ECB to reduce interest rates or increase their bond purchase program. Low inflation expectations and the potential for deflation was the driving force behind the cut in short term rates.

The BoE met on Thursday and as expected there was no change in policy. Recent strength in UK data has created expectations that a rate increase might be in the cards. The strength in the pound has in turn generated weakness in the greenback which usually coincides with strength in gold prices.

Prior to the ECB announcement on rates investors needed to absorb some EU manufacturing data. Spain’s Industrial production was stronger than expected, growing at 1.4% year over year while Germany’s was on the weak side, falling 0.9% year over year versus expectations for 0.0% growth.

The EURUSD sliced through support levels created by an upward sloping trend line which connected the lows in July with the lows in September that came in near 1.3450. Momentum on the currency pair is negative with the MACD (moving average convergence divergence) index printing at its lowest levels in the past 6-months. The RSI broke through to new lows and is printing near 34 which is on the lower end of the neutral range.

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