parmveer.sunnar's picture

This day in FX market history-ECB cuts prime rate to 0.05% from previous record low of 0.15

September 4th 2015 marks the one year anniversary in which the ECB once again reached into their monetary policy toolbox in an attempt to stimulate the ailing European economy. The ECB cut interest rates to a record low, more precisely the benchmark refinancing rate was cut from 0.15% to 0.05% and the overnight deposit rate was set at -0.2%. The cut was not expected by many market participants and volatility ensued across all markets not just FX e.g) European stock markets pushed aggressively higher such as the DAX, which was up 1.02% by the end of the day. We can see from the charts below the aggressive drop off in EURUSD and the equally sharp rally in the DAX.  This is as expected due to the negative correlation between the DAX and the Euro.

One year on, it is especially poignant when we consider the recent statements made during the ECB press conference in which further monetary easing was hinted at. Specifically Mr Draghi stated that further QE was likely until September 2016 and that even negative interest rates had not been ruled out in order to get the Euro zone back on track to meet growth and inflation targets. The reaction was as expected similar to the rate cut of 2014 whereby EURUSD sold off sharply.

Being that the debate on a rate liftoff in both the US and the UK is heating up, it is important to note that not all economies are so far ahead in their monetary policy schedule. Indeed the IMF has come out recently and warned against central banks raising interest rates amidst slower worldwide growth and macroeconomic risk stemming from China. We have also recently seen rate cuts from the likes of Australia and China due to falling commodity prices and slowing growth overall. This is why it is important to analyse past interest rate changes, especially those that were unexpected (or in other words not priced in) as it can help given an indication of future market moves, although not perfectly.

With regards to the future, caution must be taken with the rhetoric that is being churned out by the major news wires specifically with regards to the FED and BoE rate liftoff. As we have recently seen by the ECB developments out of China and lower commodity prices are having a strong downward impact on inflation and growth on the major western economies. So perhaps it is not a rate liftoff that traders should be preparing for but rather a sustained period of further monetary easing