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The Euro crashes

Published: 7 Sep at 7 PM Tags: Pound Sterling, Euro Exchange Rate, Dollar Exchange Rate, Forex, Euro Crisis, Inflation,

In a day dominated by the latest policy announcements from the Bank of England (BoE) and the European Central Bank (ECB), the Euro felt the full force of the surprise policy announcement from ECB President Mario Draghi and promptly fell over 1% in the afternoon trading session against both the Pound and the US Dollar.

For its part, the BoE’s Monetary Policy Committee (MPC) decided yesterday lunchtime to keep its main policy rate and the size of its asset purchase facility unchanged at 0.5% and £375 billion respectively. We will have to wait a fortnight to find out how the nine member MPC voted but analysts expect the same seven to two split as was the case in August.

Forty-five minutes after the BoE announcement it was the turn of the ECB and its president, Mario Draghi did not disappoint, surprising the markets with the announcement that the ECB’s Governing Council has agreed to both cut interest rates and embark on a bond-buying program and that both decisions were not unanimous.

The ECB has been under pressure to address the weak inflation figures and stagnant economic recovery of the euro zone cut its main refinancing rate by 10 basis points from 0.15% to 0.05% and the deposit facility by another 10 basis points from 0% to a negative rate of -0.20%.

The ECB will also start to buy non-financial assets through an asset-backed security programme from October 2014 with the aim of improving lenders' balance sheets, clearly in the hope that it encourages them to provide credit and thus stimulate economic growth in the euro zone.

Of interest, the ECB cut its economic growth forecasts for 2014 from 1% to 0.9% and for 2015, from 1.7% to 1.6% but raised its forecast for economic growth in 2016 from 1.8% to 1.9%.

The Euro came under immediate selling pressure which continued for the rest of the afternoon. It gave up the week long gains made against the Pound which had fallen all week on the latest polls coming out on the Scottish referendum.

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