What Trichet Had to Say in ECB Meeting

ECB President Trichet does it once again. He has under delivered and postponed the inevitable. This morning, the central bank cut interest rates by only 25bp to 1.25 percent instead of the widely expected 50bp cut, sending the Euro through the roof.

Some questions immediately come to mind, which Trichet elegantly answered in his post meeting press conference (disclaimer: these are my interpretations):

Why Did the ECB Cut by 25bp Instead of 50bp?

1. To Maintain Rate Corridor
2. Give Themselves Room to Cut Again in May
3. 6 Month and 12 Month Money Market Rates are Below U.S. Levels

Will Interest Rates Be Reduced Further?

Yes, next month probably by another 25bp to 1 percent. Trichet explicitly said that 1.25 percent will not be the low.

What About Quantitative Easing and Non-Standard Measures?

Brace yourself, full details should come on May 7th (their next monetary policy meeting). The central bank will decide at that meeting if they want to implement new unconventional measures and if so, they will provide full details.

What is the outlook for growth and inflation?

ECB expects inflation to turn negative in the middle of the year and back to positive towards year end. As for growth, it should remain weak in 2009 but gradually recover in 2010.

What does this mean for the Euro?

This is my opinion and not the ECB’s. The Euro could rally a bit further this week because of position adjustments (many people anticipated a 50bp rate cut) but since the ECB will be cutting again and there is still a lot of uncertainty surrounding the scope of nonstandard measures, further gains in the EUR/USD over the next month could be limited.

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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