Euro Ends Modestly Higher Amidst ECB Optimism, But Door Is Open to Further Rate Cuts

The release of the ECB’s decision to leave rates unchanged at 1 percent at 7:45 ET initially weighed on EUR/USD, as Credit Suisse overnight index swaps had actually been pricing in a 62 percent chance of a 25 basis point hike as of Wednesday. However, ECB President Jean-Claude Trichet’s subsequent press conference at 8:30 ET proved to offer some support for the euro, as EUR/USD gradually climbed higher thereafter. In his comments, Trichet called current rates “appropriate” and said that recent data suggest that the Euro-zone recession may have bottomed during the previous two quarters, and that “economic activity over the remainder of this year is expected to decline at much less negative rates,” with quarterly GDP likely to rise into positive territory by mid-2010. On the inflation front, annual CPI growth is projected to “decline further and temporarily remain negative over the coming months, before returning to positive territory by the end of 2009.”

During the Q&A session, Trichet said that rates aren’t necessarily at their lowest level, suggesting there may be room for additional rate cuts. He also went on to say that the ECB will begin their 60 billion euro covered bond purchasing program in July, and that the central bank plans to fully implement the purchases by June 2010. The ECB will buy bonds directly in the primary and secondary markets, the issues are required to be at least 500 million euros in size, and bonds can be linked to assets from either private or public entities. The “credit easing” program is relatively small compared to those implemented in the UK and US, and Trichet refused to comment on any eventual expansion of the program.
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