Lowering Interest Rates in Europe: What will be the Impact?

Daily Forex Fundamentals | Written by FOREXYARD | Feb 04 09 10:33 GMT |

Recently, the developed countries, from the West to the Far East, have substantially cut short-term interest rates in order to stimulate their economies. When we take a look at the Euro-Zone Minimum Bid Rate, we see that the European Central Bank (ECB) currently holds the lowest interest rate it has had since the EUR's introduction in 1999. It currently stands at 2.00% from 3.75% back in October. The most significant economic news releases that analysts are focusing their attention on this week are the scheduled decisions by the BoE and ECB on Thursday at around 12:00 GMT on whether or not to cut these rates even further. Here is ForexYard's analysis as to the impact these decisions will carry on the EUR and how forex traders can benefit from the impending price movements. Read the next article to see the impact the BoE's rate cut will have on the Pound. EUR - ECB Minimum Bid Rate Decision and its Impact In the past 3 months, the Euro-Zone's economy has continued to deteriorate. Several months ago, it was previously thought that Europe's economy wouldn't suffer as much as Britain and the U.S. However, recent economic data has proven the forecast to be incorrect. As a result, the European Central Bank (ECB) has continued to make successive rate cuts since October 2008 in order to stimulate the Euro-Zone economy, and lift it out of recession. For example, the ECB made a 50 basis point rate cut last month, following Britain's own cut of a similar size. On one hand, there is evidence that backs a possible Euro-Zone rate cut. The reason is because large European banks, such as Spain's Santander and Germany's Deutsche Bank, have suffered losses mirroring those of Britain's Barclays, RBS, and Lloyds. One may draw from this that the situation in the Euro-Zone is catching up with Britain very quickly. Despite this, many analysts forecast that the ECB won't cut rates. This is so because analysts believe the ECB's main rate cuts have already taken place. Therefore, cutting the Minimum Bid Rate in the Euro-Zone will abolish the ECB's ability to use further monetary easing to overcome the current recession. However, if rates are cut, the EUR may fall dramatically against the USD and JPY. This is because investors buying the EUR with these other currencies to fund carry-trades would then likely unwind these positions and buy back into the lower-yielding currencies. In this scenario, the EUR may also record bearishness against the GBP, as investors have already taken Britain's rate cut into account. Additionally, investors might pour back into the Pound due to fears about increasing instability in the Euro-Zone, and could possibly drop the pair to 0.8500 price level by the middle of next week. The EUR/USD rate is currently at 1.2990, and could hit 1.2550 if the ECB cuts its Minimum Bid Rate from 2.00% to 1.50% tomorrow afternoon. Traders can capture the profits from this bearishness by entering their short positions early and riding the wave as it picks up momentum directly after the interest rate decision is announced. FOREXYARD Disclaimer: Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This and any analysis published or received from FOREXYARD is for informational use. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in the analyses. While we try to ensure that all of the information provided is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. FOREXYARD will not be held responsible for the reliability or accuracy of the information available. The content herein is provided in good faith and believed to be accurate; however, there are no explicit or implicit warranties of accuracy or timeliness made FOREXYARD or its affiliates. The reader agrees not to hold FOREXYARD or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.