So the decision by the Eurpoean central Banks to cut the benchmark rate to a record low 0.25 percent from 0.5 percent was completely unexpected.
It’s questionable whether a cut at the already low level the benchmark rate was at is going to do much but it underlies two points. The first is that the ECB under President Mario Draghi is the most pro-active than has ever been before. The second is, what is it that actually concerns the ECB given that there is growth albeit at a slow place.
Any fears are probably centered on a stalling euro zone recovery. The ECB is privy to far more data than the rest of us and their depth of intellectual acumen is far greater. So we should probably just be thankful that they are willing and able to take action. Lower rates may not be passed on by all banks and in the peripheral euro zone nations the cut may not be felt at all but in theory it should now be cheaper for companies to borrow which will enable them to create new jobs as they expand.
For anyone in the euro investment arena, yesterday hurt with the sharp and dramatic drop in the single currency. But the ECB probably didn’t mind at all given the stronger euro was already raising concerns about exports.
The euro probably has more downside in the near term just because of the ECB’s unexpected action. But bigger picture it is going to depend on the Fed and QE tapering. Trade after the ECB decision which saw the dollar rally was euro weakness rather than a fundamental sentiment change on the dollar. Though the better-than-expected U.S. GDP number didn’t hurt the greenback.