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 The ECB promised to act and delivered with a negative deposit rate of 0.10% and a cut of the main lending rate to 0.15%. In addition, the rate announcement included an announcement that more steps will be announced in the press conference. And now,Draghi certainly delivers with detailed program: Targeted loans, no more  sterilization  of the SMP and a preparation of a potential QE  program. However, the ECB did tweak forward guidance in a way that closes the door on further rates cuts. EUR/USD fell towards 1.35 and bounced all the way back to above 1.3560.

Here is a live blog of the event:

Highlights

  • No sterilization of the legacy SMP program
  • Targeted LTRO called TLTLROs – aimed to reach the real economy. The size is €400 billion
  • Commitment to keep low rates
  • Negative rates to apply also to various deposits
  • 2014 GDP forecast downgraded
  • But, “Rates are at their low bound”: Draghi proverbially shoots himself in the foot and EUR/USD rises.
  • EUR/USD crashes to 1.35 but  recovers.

Live Blog

  • 12:15 GMT. The press conference begins at 12:30. All times are GMT.
  • You can follow the press conference live here.
  • 12:15 EUR/USD jumped up and down in a range of 90 pips and eventually plunged in reaction to fresh lows at 1.3556.
  • 12:17 EUR/USD levels: 1.3560 provides immediate support.
  • 12:18 To the downside, we have 1.3475 as an important line, followed by the round 1.34 level and 1.33 serving as the ultimate support line. On the upside, we have 1.3615 as weak resistance, followed by 1.3650 as strong resistance.
  • 12:20 At 12:30 GMT, the US will release weekly jobless claims. A rise from 300K to 309 is expected.
  • 12:22 For reference, here is the official ECB announcement about the low rates. Here is the Forex Crunch coverage.
  • 12:23 EUR/USD is ticking higher now, to 1.3575.
  • 12:23  The next move in EUR/USD depends on the size of the programs that Draghi  announces: a small liquidity injections will have  a small impact. A pre-announcement of QE could really send EUR/USD way down.
  • 12:25 The  Asset Quality Review of the banks will also be discussed.
  • 12:26 EUR/USD ranges at 1.3560 to 1.3575 before the announcement.
  • 12:28 FLS was not a huge success in the UK, but the ECB could tweak it.
  • 12:29 Draghi would certainly want to see a lower  value of the euro.
  • 12:30 US jobless claims rise to 312K. Press conference awaited.
  • 12:31 Press conference begins
  • 12:31 Combination of policy measure to support the economy.
  • 12:32 Further reductions in interest rates, targeted LTROs, preparatory work for QE, no SMP sterliziation
  • 12:32 Pre-announcement of QE is a big thing and EUR/USD falls to 1.3520.
  • 12:33 Forward guidance says that these levels will stay for a long time, and further action is possible.  Unanimous  agreement to use more tools.
  • 12:34 Draghi begins explaining
  • 12:35 Targeted TLTLROs. 7% – up to 400 billion euros TLTROs
  • 12:36 Draghi details generous TLTROs.
  • 12:37 TLTRLO interest rate will be market levels + 0.10% for the lifetime of the loans.
  • 12:38 The ECB will make sure that the money reaches the real economy.
  • 12:39 EUR/USD falls to 1.35.
  • 12:40 Draghi delivers dovish details of the programs and now moves on to preparation of QE.
  • 12:41 MROs as fixed tendered procedures with full allotment, at least until December 2016.
  • 12:42 SMP sterilization to end – more money to flow into the euro-zone.
  • 12:42 EUR/USD finds support at 1.35 after Draghi finishes detailing the wide measures. He now talks about low GDP growth.
  • 12:43 The assessment of a moderate recovery is included in the staff projections.  Annual GDP 1% in 2014, 1.7% in 2015, and 1.8% in 2016. Projections have been revised to the downside for 2014 and to the upside for 2015.
  • 12:44 Inflation is only 0.5% in May 2014.
  • 12:45 Lower inflation underpins today’s decision.  
  • 12:47 HICP 0.7% in 2014, 1.1% in 2015 and 1.4% in 2016 – all forecasts have been downgraded to the downside.
  • 12:48 Governing council sees downside and upside risks as limited and balanced. Will closely monitor the exchange rate.
  • 12:50 EUR/GBP is digging into new cycle lows: 0.8068.
  • 12:51 Loans  are weak
  • 12:51 To sum up: the situation triggered the measures.  
  • 12:51 EUR/USD recovers in the meantime to 1.3530.
  • 12:52 Continued progress in battle against  high public deficit.
  • 12:53 Progress has been uneven.
  • 12:53 The bounce off 1.35 has proven important for EUR/USD. Will Draghi send it down in the Q&A?
  • 12:54  Questions begin
  • 12:55 The ECB dropped the “or lower” segment in the FG. Is this the end of rate cuts?
  • 12:56 “For all the practical purposes, we have reached the lower bound” – adjustments might come though. EUR/USD rises to 1.3540.
  • 12:56 Additional reporting will be needed in TLTROs.
  • 12:58 Question about  future QE and about the SMP.
  • 12:59 Are we finished? No.
  • 12:59 SMP started when  inflation  was above 2% and now this has totally changed. That’s why SMP draining was suspended.
  • 13:00 EUR/USD ticking lower to 1.3536.
  • 13:01 Unconventional instruments are at hand.
  • 13:02 We reinforced the forward guidance, with extending the full allotment and the TLTRO.
  • 13:03 Rates to stay low, for even longer than foreseen.
  • 13:04 It lower the cost for funding for banks, but only for the real economy.
  • 13:04 Attributable contribution of the TLTROs to the real economy could take 3-4 quarters.
  • 13:05 ABS should be based on real loans, and be transparent.
  • 13:06 Analysis:  The trimming down of forward guidance could more than counter all the wide measures presented
  • 13:06 EUR/USD is at 1.3538 and refuses to test lower ground.
  • 13:07 We had a deep prolonged discussion. There was a consensus quite immediately.
  • 13:08 When I’ve been asked about deflation, the answer was and still is: no – no self fulfilling spiral.
  • 13:09 Food and energy and the exchange rate weigh. Not much has changed.
  • 13:10 The longer low inflation lasts, the bigger the risk.
  • 13:11 It’s quite clear we are not finished, but EUR/USD stabilizes. The GC is ready to use unconventional instruments. QE is certainly on the table.
  • 13:13 Draghi rejects German  criticism about “expropriating savers”.
  • 13:15  Lowering rates to the public is within the mandate of the banks.
  • 13:17 Our package is not a disincentive for structural reforms.
  • 13:18 Analysis:  Did Draghi make a critical mistake with forward guidance?
  • 13:20  By  closing the door on  lower rates, EUR/USD and EUR/CNY could rise, more than countering the huge TLTROs.
  • 13:21 Draghi refuses to ask questions about European leaders.
  • 13:23 Reforms are needed.
  • 13:23  Exchange rate is not a target but important for price stability and growth. Current level of inflation impacted by exchange rate.
  • 13:24 70-80% of inflation change due to exchange rate.
  • 13:25 Question: is it enough?
  • 13:25  Inflows into the euro-zone have moderated.
  • 13:28  Situation has improved since the crisis began.
  • 13:30 EUR/USD already above 1.3550.
  • 13:33 Press conference ends. EUR/USD is back to the drawing board, at 1.3575 or even higher.

The focus shifts to the United States with the Non-Farm  Payrolls. See how to trade the NFP with EUR/USD.

Background

Expectations were super high towards this specific rate decision. Draghi created them last time with a promise / threat to act. A wide array of tools, some conventional such and some not were considered. While rates were already announced earlier, the press conference is set to include announcements of new measures such as a new LTRO, a Funding for Lending scheme or even  Quantitative Easing.

Here are all the options: ECB Preview: Going negative and beyond – 6 options for Draghi. So far, Draghi has delivered on the first two items.

In addition and as we have already learned, Draghi leaves some surprises for the  Q&A session that follows the statement.  For EUR/USD, the big questions are: what is already priced in? And how will  markets react after the dust settles?