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Are negative interest rates really possible?  Yes is the answer

The dust is still settling after ECB President Mario Draghi shook up the markets this morning at this press conference following the ECB monthly meeting.

At that meeting, the ECB decided to lower interest rates by 25 bps to 0.50%.   Following that announcement at 7:45 AM EST, the EUR actually began to appreciate from the level of 1.3150 to a little above 1.3215.   While most would argue that lowering the rates should have seen the EUR go lower, the move was so expected and “priced in”, that the currency went higher.

But that was just the appetizer!   The main course was still to come.Over the last few months, traders and analysts alike, have marveled at ECB President Mario Draghi’s ability to “talk the EUR higher”, despite continuing bad news regarding the EUR economy.

Over the last few days that bad news has continued, and this morning, Eurozone PMI results results were not good all remaining below the 50 level, indicating the recession continues in the Eurozone.   But, traders had bought the currency after the ECB because certainly President Draghi was going to say something “positive”.

Not so fast my friends!!   This time on top of the rate cut, President Draghi informed us that the bank is technically ready for negative interest rates and actually commented on downside risks affecting the economy.

Mr. “Cheerful” had turned into Mr. “Gloom and Doom”.   Throughout the demise of the European economy, the central bank had kept the deposit rate at zero, in an attempt to discourage banks from just leaving money their money there, hoping this would get the lending market going.   If the central bank moves to a negative interest rate, then that would mean that banks would actually have to pay the ECB for holding their deposits.

This   would certainly help to “stimulate” the lending market.Is this “negative” interest rate scenario possible?   I have no doubt that it is.   Remember, Draghi has said he now has an open mind towards the idea.   That to me means it is inevitable.

Traders will now be wary at the next few ECB meetings to see if they go through with this idea.   Declining economic numbers will now fuel speculation every time there is a “bad” number released.

Just like “FED watchers” look for hints of the ending or lessening of quantitative easing, “ECB watchers” will now be on a negative interest rate watch.As for the currency itself, as, stated earlier, after spiking to a high of 1.3215, the EUR lost over 100 pips in a matter of minutes.   Support levels were crushed before the currency bottomed out at 1.3037.

We have since retraced to the 1.3070 area.   It is hard to say how they market “feels” at the moment.   Tomorrow’s US non-farm payroll release will have a huge impact on the currency market, more than it usually does.   A “good” number would fuel this USD resurgence.   At the moment, the forecast is for an increase in jobs of 150,000 for April after a 88,000 job hike in March.

Keep in mind the March number was woefully below the expected number and was the beginning of the dollar down, EUR up move.

See how to trade the Non-Farm Payrolls with EUR/USD.

Tomorrow could do a lot to continue reversing that trend.   Or, as has happened in the past, the expectation is so far off, that the number disappoints and the EUR is back at 1.3200 in a blink of an eye.

Needless to say this will be a nervous overnight trading session ahead of tomorrow’s release.Technically, support remains at 1.3030, followed by the psychological level at 1.3000.   I don’t expect to see that happen this afternoon and don’t expect too much of a trading range tonight.

The break of 1.3000 accelerates the move towards 1.2955.   On the topside, we would need to see a close above 1.3155 to negate the negative feelings.   I don’t expect that either.So, we’ll rest up and wait for 8:30 tomorrow morning.   I have my normal morning report before that.

 

Matthew Lifson

Matthew Lifson

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.