The euro was pummeled in Asian and early European trade in the wake of comments by Jean Claude Trichet that indicated ECB may lower rates below the 1% limit suggested earlier in the week. In a speech in Tokyo President Trichet stated that, “Any ambiguity in our medium-term policy direction would delay the return of sustainable prosperity, because that would undermine confidence, which is the most precious ingredient in the present circumstances.”

Massive redemption flows of about $45 Billion in European bonds and dovish comments from ECB President Jean Claude Trichet sent EUR/USD to a monthly low of 1.3064 in Asian trade today as the currency suffered losses for the fourth day in a row.

You can never underestimate the hawkishness of the ECB. This morning, the central bank cut interest rates by 25bp to 1.25 percent, driving the EUR/USD sharply higher following the smaller than expected move. Here are 3 reasons why the ECB cut by 25bp instead of 50:

The ECB shocked the market by lowering its overnight rate by only 25bp to 1.25% versus consensus calls of a 50bp cut despite the worsening economic conditions in the Eurozone. The EUR/USD immediatey shot ot 1.3400 but traders will await the post announcement press conference with Jean Claude Trichet to draw further conclusions.

German and French PMI readings improved for the first time in months suggesting that that vicious contraction in demand that dogged the region over the past year may be showing nascent signs of stabilization. German Manufacturing PMI printed at 32.2 vs. 31.9 eyed while the Service PMI rose slightly to 41.7 from 41 forecast. The French data was better with services rebounding to 42.9 from 40.2 expected and manufacturing registering a reading of 36.3 versus 35 called. The EZ Composite PMI number also rose to 40.1 from 39.2 the period prior.

As expected ECB cut rates by 50 basis point taking the overnight rate below the 2% barrier for the first time since the euro began. With Eurozone economy contracting by -1.5% in the latest quarter and unemployment skyrocketing across the region, the generally hawkish central bank had no choice but to ease monetary policy further.

The US dollar traded higher against the Euro and commodity currencies but remained unchanged against the British pound and Japanese Yen. The strength of the dollar can be attributed to three primary factors.

Over the next 24 hours, the Bank of England and the European Central Bank will be making interest rate announcements. The Bank of England is the only central bank expected to cut interest rates, but that does not mean that the Euro stay stationary. In fact, we expect some big action in both currencies, which could lead to more volatility for EUR/GBP.

The euro rebounded in Asian and early European trade tonight after yesterday’s ECB’s decision to lower rates by 50bp to 2.00%. The pair reached its lowest level in a month yesterday when it hit a low of 1.3024 after Jean Claude Trichet admitted that the economic situation in the Eurozone was deteriorating rapidly and suggested that more cuts would be coming.

After having cut interest rates by 50bp this morning to 2 percent, ECB President Trichet is finally buckling down and signaling that he is ready to cut interest rates again BUT NOT UNTIL March.

The ECB lowered rates by 50bp to 2% in line with market expectations and the euro remained steady in the aftermath of the announcement as traders awaited the ECB press conference scheduled for 13:30GMT.

Tomorrow’s ECB rate announcement due 12:00GMT is shaping up to be one of the key events in the central bank’s ten year history. With Euro-zone economy facing one of the worst economic slowdowns in decades Mr. Trichet and the governing council are under enormous pressure to abandon his ”Bundesbanke-like” rhetoric and begin to ease aggressively.

The EUR/USD continued its descent today in early European trade coming within 20 points of the 1.3200 figure as worries over the credit downgrade of Spain and a series of EUR/JPY sales weighed on the pair for a second day in a row. The Nikkei closed down nearly 5% after Japanese investors returned from their Monday holiday and this latest wave of risk aversion kept the pressure on the euro while propping the dollar and the yen.

The EUR/USD gave up all of it late Asian session gains slipping below the 1.3600 figure in early European trade as news of a much sharper than expected contraction in German Trade surplus weighed on the unit. German trade surplus shrank to 10.7 Billion euros - far worse than the 14.0 Billion euro expected by the market, as exports collapsed by more than 10% in November due to massive pullback in global demand for capital goods.