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Today’s interest rate cut by the European Central Bank caught many by surprise with the Euro slumping by over 150 points against the US dollar. Just over a week ago, the Euro was trading at over 1.38 against the US dollar. A few minutes ago it was around 1.3330. A substantial fall in such a short duration – the behaviour of the markets demonstrated that the move was a surprise but why was it?

The Euro is massively over valued on fundamentals against the US dollar and I have been harping on about this for quite a while. All those analysts, especially technical ones harping on that $1.40 against the Euro is inevitable surely have egg on their face!

Economic data has been weak in much of Europe with Germany the exception. However, growth figures, PMI and unemployment have been weak and a Euro that is at least 10 per cent overvalued against the US dollar does not help the export of European goods. Surely, today’s news is no surprise. The Italian finance minister went on record saying that the Euro poses risk to the recovery in Europe a couple of days ago – ECB President Mario Draghi obviously took his words to heart. Figures last week show that deflation is a concern in Europe as the annual inflation rate in the euro zone fell to 0.7 per cent in October, far below expectations of 1.1 per cent and well below the bank’s target of just below 2 per cent.

The strong Euro is a major hindrance for many foreign tourists visiting the beautiful countries of Europe with Greece, Italy, Portugal and Spain heavily reliant on foreign visitors. Today’s interest rate cut and welcome fall in the Euro will perhaps act as a catalyst in providing the European tourism industry the boost it so craves. Unemployment above 50 per cent amongst the under 30 year olds in much of peripheral Europe may start to fall as more jobs are created in tourism related industries and provide a boost to European GDP.

Equity markets surged on news of the cut in the Euro interest rate with the major European bourses more than 1 per cent higher and bond prices increased also. Have we seen the start of a much needed reversal in the strength of the Euro and is 1.30 against the US dollar on the horizon very soon?!

More:  EUR/USD loses two long term support lines – very convincingly