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UPDATE Euro Tests 1.2500 -Trichet Opens The Door to QE

Last updated 3/5/2009 9:21 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

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.  

In his post decision press conference ECB President Jean Claude Trichet  noted that the central bank was already practicing what he called "Non Standard" measures as it  provided massive liquidity to member banks by taking a variety of non traditional collateral on the ECB's balance sheet. Mr. Trichet reaffirmed the ECB's commitment to this policy by stating that current financing arrangements would be extended at least to the rest of this year.

When confronted directly with the question of quantitative easing Mr. Trichet noted that the council was discussing both the possibility and the process by which such a policy could take place in the Eurozone.  His statement suggests that ECB is clearly considering the idea but may be stymied by the structure of the EZ economic system which unlike its G10 counterparts issues a variety of sovereign debt with different degrees of credit risk.

Furthermore, Mr. Trichet did not rule out additional rate cuts this year and lowered the growth estimates for the region as whole going forward, noting that the recovery will be slower than the central bank forecasters had initially thought.

In short it appears that for the time being European monetary authorities prefer to continue their policy of credit easing rather than quantitative easing given the difficulty of implementing such a policy under the confederate Eurozone structure.

The EUR/USD slipped below 1.2500 level as newly lowered growth estimates, lack of any definitive quantitative easing plans and the possibility of additional rate cuts all weighed on the unit. 1,2450 now becomes the target of euro shorts once the 10 AM New York cut for barrier options passes.  

It appears that given today's reluctance by the ECB to engage in any additional "Non standard" measures aside from those already taken will be viewed negatively by the market which is still looking a significant stimulus initiative from the 16 member union.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.