10.07.11

Euro reacts positively to the Decisions of the ECB

This has been an important week for the Euro due to the fact that there were risks according to which the European currency is going to be faced with a tremendous fall due to the fact that the sovereign debt crisis continues to be important in the region and to the speculations regarding the European Central Bank’s decision concerning the interest rates.

The decision of the European Central Bank has been taken today and it was that of maintaining the same value of the interest rates, but of expanding the program of bond purchases. The announcement of this decision has caused the Euro to fall at the beginning, but the European currency has managed to rebound afterwards. The European Central Bank has announced today the fact that it leaves its target Minimum Bid Rate at the value of 1.50 percent, decision which has been forecasted by most of the market’s analysts, even though there have been some of them who believed that the ECB is going to perform a cut of the interest rates.

But the European Central Bank has announced today its version of quantitative easing, by stating the following: “The Governing Council of the European Central Bank (ECB) has today decided to launch a new covered bond purchase programme (CBPP2). The programme will have the following modalities:

  • purchases will be for an intended amount of €40 billion;
  • purchases will have the capacity to be conducted in the primary and secondary markets and will be carried out by means of direct purchases;
  • purchases will begin in November 2011 and are expected to be completed by the end of October 2012.”

The first reaction of the Euro to this announcement has been a negative one, but the European currency managed to rebound afterwards, proving that the theory according to which the decision of expanding the asset purchase without decreasing the interest rates has been a positive one for the Euro, at least for the present moment.

Jean-Claude Trichet, the President of the European Central Bank, has discussed about the Europe bank recapitalization, which has had the effect of reinforcement of the hopes related to the fact that the central bank is prepared to support the European Union’s banking system: “The situation of the banking sector calls for particular attention, taking into account the interplay between sovereign risk issues and banks’ funding needs. As we have done on previous occasions, the Governing Council urges banks to do all that is necessary to reinforce their balance sheets, to retain earnings, to ensure moderation in remuneration, and to turn to the market to strengthen further their capital bases. Where necessary, they should take full advantage of government support measures, which should be made totally operational, including the possibility in future for the European Financial Stability Facility (EFSF) to lend to governments in order to recapitalise banks.”

The EUR/USD pair increased from 1.3347 to 1.3399, after it has previously fallen to 1.3241. The EUR/JPY pair grew from 102.50 to 102.72, after it had previously reached the daily low of 101.65.

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