The ECB, Gold and U.S. dollar – This morning the European Central Bank (ECB) surprised global markets by slashing key interest rates to a new record low of 0.05% from 0.15%.

Image courtesy Monika Flueckiger/the World Economic Forum: http://www.flickr.com/photos/worldeconomicforum/

ECB President Draghi, also announced additional monetary policies with the ECB’s plan to launch asset-backed securities (ABS) purchasing and covered bond purchasing programs.

In addition to the asset purchasing program and covered bond program President Draghi also announced he will be lowering the deposit facility rate to -0.20% from -0.10% and the marginal lending rate from 0.40% to 0.30%. The ECB plans to begin its purchasing programs in October.

Why did the ECB react so strongly?

Euro Zone data is now clearly indicating inflation across the region is continuing to drop. The ECB has the target inflation just below the 2% mark and last month’s inflation rate hit a five year low of 0.3%.

The ECB’s move can be seen in the currency markets with the EUR/USD dropping more than 1.12% so far in the session. This is the largest single session moves in 2014 for the Euro pushing the pair to new 52 week low of 1.29949.

Further downstream we can find gold prices reacting in a tug-a-war fashion as the U.S. dollar strengthens it puts pressure on the gold prices but concerns of the euro zone falling into a recession and global tensions from Iraq to the Ukraine and Russia has supported the price of gold. Gold prices currently are basically flat.

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