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In his first press conference as the president of the ECB, Mario Draghi explains the  decision to cut the interest rate from 1.50% to 1.25% and describes the risks to growth as “materializing”. EUR/USD reacts with a extended drops on the worrying tone of Draghi.  

EUR/USD is already at support at 1.3725 and threatens to break lower. Update: this line is lost after Draghi says that Europe is headed towards a mild recession by year end.

Live updates.

13:20 GMT: EUR/USD is at 1.3760. All times are GMT.

13:23 Background: The rate cut came as a surprise for many, but it certainly was on the cards, given the discussion about it last month, and the deteriorating economic situation, related and unrelated to the debt crisis. This is a reverse of the rate hike made by Draghi’s predecessor, Jean-Claude Trichet, in July.

13:25 The markets were rocked by the announcement of a Greek referendum made last night. But then, the chances of a government collapse in Greece rose, pushing the euro higher, on hopes that the referendum will be cancelled.

13:28 EUR/USD eases just before the presser begins. Support is at 1.3725, followed by 1.3650. Resistance is at 1.38, with the really important cap at 1.3838.

13:31 Press conference begins.

13:32 Inflation has remained high and is expected to remain above 2% but expected to drop below 2% in 2012

13:33 After the decision, inflation should be in line with expectations.

13:34 Intensified downside risks – some risks are  materializing. EUR/USD slides to 1.3735.

13:35 Draghi hints about risks of recession while talking about the mandate of the ECB regarding to inflation.

13:35 Liquidity to banks is important and help is temporary.

13:36 Risks have been materializing and growth is expected to be very moderate. Draghi talks about the drop in global demand, and the debt crisis.

13:36 Uncertainty is high, financial markets tension can spill into the real economy. Oil prices are problematic as well.

13:37 Inflation remains high but is mostly due to oil and commodity prices. Inflation is expected drop. EUR/USD is dropping to 1.3737.

13:38 Risks to inflation remains broadly balanced, after the current decision. Inflationary pressures should abate.

13:39 EUR/USD holds above support at 1.3725.

13:40 Financial market tensions haven’t impacted until September but the situation can worsen.

13:41 Banking stability is critical to growth. ECB welcomes the decision about bank recapitalization.

13:44 ECB calls governments to make more reforms and enhance longer term growth potential.

13:45 Draghi focuses on labor market reforms and also in enhancing competitiveness.

13:46 EU Summit decisions must be implemented.

13:47 Questions begin: Was the decision unanimous and why was it made? Decision was unanimous.

13:48 Reasons: Worsening PMIs, drops in consumption, new orders growth, Euro barometer, etc.

13:49 Q:  When will bond buying stop? Draghi says it is temporary and meant to transmit monetary policy in a better way.

13:50 The situation in Greece is evolving quickly says Draghi. Indeed, Papandreou is determined to have the referendum. EUR/USD is dropping to 1.37.

13:52 Are we heading for a recession? Answer: Mild recession by year end.

13:53 The use of the word Recession sends EUR/USD under 1.37. “Inflation expectations are anchored”.

13:54 Regarding Chinese help, it is not the business of the ECB.

13:55 What about Italian bonds? Answer: we haven’t been focusing on Italian discussions.

13:57 Regarding a euro-zone breakup, it’s not in the treaty.

13:58 Are interest rates appropriate now? Answer: We never pre commit…

13:59 “We are all bound by the treaty” regarding euro-zone exodus of Greece.

14:00 EUR/USD falls to 1.3677.

14:01  Draghi says that all indicators are weak and that forecasts might need to be revised to the downside.

14:02 No risk to price stability by the rate cut, and no deflation on the horizon.

14:03 In the meantime, US ISM Non-Manufacturing PMI slid to 52.9. Expectations were for a rise to 53.7 points, so this adds to global worries. Factory orders surprised with a rise of 0.3%, contrary to expectations of no change.

14:04 “We are using the treaty as the reference point for our decisions”.

14:05 VP Constancio reminds us that a rate cut was on the cards also in the last meeting, and that the situation has worsened since then.

14:06  More bond buying? Draghi provides a very general answer.

14:09 He refuses to sate future bond buying and sends reporters to the weekly reports.

14:10 Regarding the balance sheet, Draghi also refuses to answer.

14:15 EUR/USD manages to recover some of its losses and gets close to 1.37

14:16 Draghi expects a Chinese contribution in the G-20 Summit.

14:17 “The Greek situation is unique”  – no debt reduction for Ireland!

14:18 Is Draghi loyal to the Bundesbank principals? “I have an admiration for the German Bundesbank”. But no commitment for the future…

14:19 Can Italy make reforms at this moment? Will the ECB be forced to buy bonds for a long time? Answer: We are independent. No response to the political question.

Press conference ended.

For more on EUR/USD, see the euro dollar forecast.

In the US, weekly jobless claims slid to 397K, largely within expectations.