ECB Cuts Rates across the Board but Draghi Quiet on LTRO Prospects

(eToro Blog) Markets were expecting the European Central Bank to cut its key refinancing rate to .75% from 1.00%, and the ECB did not disappoint; the new rate takes effect from 11 July 2012. But given the deteriorating economic outlook investors were also anxious to hear from ECB head Mario Draghi if more easing could, perhaps, be in the wings as a rate cut it was believed would not sufficiently help the troubled periphery. But in this regard, Mario Draghi did disappoint; despite a grim outlook, renewed weakness and heightened uncertainty, he made no mention of additional easing measures either during the reading of the official statement or afterward at the question and answer session.

The ECB’s reduction of its lending rate was the first ever below 1%; the ECB also decided to lower its marginal lending rate for banks and its deposit rate by an equivalent 25 basis points to 1.50% and 0.00%, respectively, and all to take effect on the 11th. Analysts are hopeful that the lowering of the deposit rate, especially, could compel banks to lend to either other rather than park overnight funds at the ECB though there is some worry that the creditworthiness of peripheral banks will be a key issue in that decision.

Markets had been upbeat following last week’s E.U. summit which concluded with an outcome that actually showed some promise. Mario Draghi’s declaration that he was in support of the plan’s various aspects gave rise to speculation that the ECB would be ready to act. Among the plan’s proposals, one would give the ECB power to act in a supervisory capacity over the Eurozone’s banks. Previously, the ECB had been adamant that the Eurozone’s governments must act as a cohesive group to resolve the crisis, and not rely on the ECB to continually come to the Eurozone’s rescue.

However, the leadership’s failure since the Summit’s end to provide any solid information or data as to how the banking and fiscal union could be achieved, has withered positive sentiment. Analysts point out that markets have become increasingly nervous over the signs of weakness, which now include indications that Germany – the E.U.’s workhorse – is being affected by the global slowdown.

Upon the news, the EUR/USD dropped to a low of 1.238 a decline of 1%, while sentiment on OpenBook is overwhelmingly driven by bulls. OpenBook guru pyruss, who is from Portugal, closed several positions on both sides of the pair profitably in the moments after the announcement with gains that ranged from 1.40% to 6.90%. The guru also placed an order to buy, and has a few currently open positions that are in the green. The guru’s 78% stake in the EUR/USD pair over the past month has gained 4.1%, and the guru’s monthly portfolio profit was 2.8%.

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