ECB leans dovish. Euro slips below support

The European Central Bank has held interest rates steady. No change to the main refinancing rate at 0.00%. No change to the deposit rate of -0.40%. This has come as little real surprise for the market. However, the ECB has also pushed the door wide open for easing in subsequent meetings, including the prospect of a package of easing measures. We look at the impact.

The changes to the statement come in three main sections:

1. Adding “or lower” – The Governing Council will now keep rates “at present or lower levels through the first half of 2020”. This was expected by the market and effectively is a nod to cutting the deposit rate in September.
2. The ECB has added a whole section discussing the need for a “highly accommodative stance” in order to combat inflation which has been persistently below its target. The Governing Council “determined to act” and “stands ready to adjust all of its instruments”.
3. The Governing Council has “tasked the relevant Eurosystem Committees with examining the options”. This is the piece that opens the door wide open. Examining tiering the deposit rate, further QE and what sort of asset purchases which would be available (perhaps including equities?).

It was expected that the ECB would use this meeting as one to lay the groundwork for easing in September. Unless there is a dramatic turnaround on inflation, then a 10 basis point cut to the deposit rate is now highly likely in September. However this could also be met with other easing measures (tiering deposit rate, resuming the Asset Purchase Program). Over to Mario Draghi to potentially add some further detail, however, the ECB is getting ready to ease.

Market impact

The market has taken this as a dovish lean. Bund yields have fallen, the euro has slipped are lower and equities have rallied.

• 10 year Bund yield – has fallen 3 basis points and ie below the early July low of -0.41%. This has now taken the Bund yield to record lows. This is also back below the current deposit rate.
• EUR/USD – 35 pips lower – crucially now the support at $1.1110 is breaking. A close below $1.1110 opens $1.1000 but the $1.0850 2017 pivot would also be open.
• DAX – The prospect of QE and perhaps even equities purchases (who knows) has seen the DAX jump 65 ticks. The bullish breakout of earlier in the week continues and the market is pushing higher and eyeing the 2019 high of 12,656.