The euro sold of immediately following a decision by the European Central Bank (ECB) to consider decreasing the deposit rate if additional quantitative easing is needed. This information was leaked by individuals familiar with the ECB talks. A cut in deposit rates would take it lower than the current negative .1 percent, which affects commercial lenders.
According to Nick Kounis, head of macro research at ABN Amro Bank NV, said that decreasing the deposit rate makes sense. “The ECB needs to do more to fight uncomfortably low inflation,” he said. The most recent inflation data showed consumer prices less than one percent as deflation talks begin to swirl. The cut in the deposit rate is a deterrent from capital hoarding commercial lenders and to spur lending to the public.
The eurodollar fell over 100 pips into negative territory almost immediately following the release of this news, currently trading at 1.3460.
This chart is a 4H comparison of the US dollar index and the spot eurodollar rate. Note: The eurodollar was up roughly 30 pips, and the dollar down .21 percent prior to the release.
However, further cuts in rates and additional monetary policy easing will face resistance from Germany. The Bundesbank President Weidmann said that further easing is not “sensible” because it detracts from the current underlying issues that are causing the eurozone’s troubles.