FX round-up: Euro still under pressure on ECB, Chinese rate cut

The euro remained under pressure, weighed by Thursday’s dovish comments from European Central Bank president Mario Draghi and a rate cut announcement from the People’s Bank of China.

In the press conference after the rate announcement, the ECB chief left the door open to the introduction of further stimulus measures at the December meeting. He said the governing council had discussed expanding its bond-buying programme and cutting the rate on reserves held at the central bank.

The euro hit a three-week low against the dollar following Draghi’s comments.

“The last ECB press conference managed to be more dovish than expectations by changing the timeline on QE to September 2016 ‘or beyond’ and increasing the issue limit size,” said RBC Capital Markets’ senior currency strategist Elsa Lignos.

“Despite the anticipation heading into the meeting, EUR/USD still traded over 100 points lower. Most were expecting nothing at this meeting but some action in December or January. And yet by doing nothing at this meeting and indirectly promising action in December, Draghi managed to get a 200+ point sell-off in EUR/USD.”

Lignos said this showed that expectations of a December/January action were probably lower than thought and short positioning in the euro is the lightest it has been in a long time.

On Friday, the euro was hit further by an announcement from the PBoC, which said it will cut its one-year deposit rate and one-year lending rate by 25 basis points each to 1.5% and 4.35%, respectively, as it looks to bolster the slowing economy. Chinese authorities also cut the reverse requirement ratio for all banks by 50 basis points to 17.5%, with an extra 50 bps reduction for some lenders.

David Morrison, market analyst at SpreadCo said that while there was still some decent support for the euro around the 1.1100 level on Thursday, Friday’s Chinese rate cut “has really done some serious damage to the euro’s technical picture”.

“The EUR/USD has crashed through 1.1100 and still looks vulnerable to further losses, despite the speed of the decline. Otherwise, the US dollar is stronger across the board and the USDJPY is running into resistance around the 121.00 area.”

At 1435 BST, the euro was trading down 0.6% against the dollar at $1.1040, 0.3% against the pound at £0.7914 and 0.3% against the yen at JPY133.66.

The greenback, meanwhile, was up 0.2% against the pound at £0.6511 and 0.3% firmer against the yen at JPY121.03.