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Euro Faces Sell-Off as ECB Adjusts Rates

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Euro Faces Sell-Off as ECB Adjusts Rates

The euro declined against it US and British counterparts Thursday, as the European Central Bank took decisive action to shore up deflation.

The European Central Bank today became the first major institution to charge a fee on deposit. The ECB cut its benchmark interest rate from 0.25 percent to 0.15 percent, a new low, and reduced its deposit rate below zero to -0.1 percent. This effectively means the ECB will charge banks to hold their reserves, an unprecedented move that has been talked about since the threat of deflation became paramount late last year.

Faced with eight months of below 1 percent inflation, the ECB felt it had no choice to but to act decisively. The latest measures, it is hoped, will spur economic growth and steer the currency union away from deflation.

Eurozone inflation fell back to 0.5 percent annually in May, below estimates. The ECB targets inflation at just below 2 percent.

The ECB stopped short of implementing Federal Reserve-like quantitative easing, which according to ECB Governing Council Member Jens Weidmann has been considered.

The euro fell against all but one of its 31 major currencies. The common currency risks further devaluation before the weekend.

The EURUSD declined 0.21 percent to 1.3570 and risks hitting a fresh 2014 low before the end of the week. The pair fell to an intraday low of 1.3512, its weakest since February. The pair is currently testing the 1.3569 support, and is expected to fall below the 1.3541 handle. The key level to watch is 1.3488, the low from February 3.

The EURUSD has declined more than 1 percent year-to-date.

In economic data, Eurozone retail sales rose at the fastest annual rate in seven years, a sign low inflation and declining unemployment are boosting consumption growth. Retail sales surged 2.4 percent year-on-year, nearly doubling up on forecasts, which called for 1.3 percent.

German factory orders surged 3.1 percent in April, the Federal Statistics Office reported today. Year-on-year, German factory orders were up 6.3 percent.

Germany will report industrial production and trade figures on Friday.

In the US, weekly jobless claims rose 8,000 to 312,000, the Labor Department reported today in Washington. Economists forecast a rise to 310,000 for the week ending May 31.

The EURGBP plummeted to an intraday low of 0.8071. The pair consolidated at 0.8090, declining 0.43 percent.

The Bank of England announced today it will hold its benchmark interest rate at 0.5 percent and keep its asset purchase facility at £375 billion, as expected. BOE Governor Mark Carney noted the economy was getting closer to the point where a rate-hike would be warranted. The BOE is expected to become the first major central bank to raise interest rates. The markets believe the BOE is on course to raise interest rates in the early part of 2015.

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